1
GENERAL PRINCIPLES OF TAXATION
DEFINITION AND CONCEPT OF
TAXATION
Taxation is the power by which the sovereign
raises revenue to defray the expenses of the
government.
It is a way of apportioning the cost of the
government among those who in some measure
are privileged to enjoy its benefits and must bear
its burden.
It is the inherent power of the sovereign exercised
through the legislature to impose burdens upon
subjects and objects within its jurisdiction for the
purpose of raising revenues to carry out the
legitimate objects of government.
PURPOSES OF TAXATION
Primary: To raise revenue to promote the general
welfare and protection of its citizens.
Secondary/non-revenue Purposes:
(RIPE)
a. To reduce social inequality;
b. To implement the police power of the State;
c. To protect our local industries against unfair
competition;
d. To encourage the growth of local industries.
NATURE OF TAXATION
1. Inherent Attribute of Sovereignty
The power of taxation is an incident of sovereignty
as it is inherent in the State, belonging as a matter
of right to every independent government. It does
not need constitutional conferment.
Constitutional provisions do not give the power to
tax but merely impose limitations on what would
otherwise be an invincible power.
Basis: Life-blood Theory
Taxes are the lifeblood of the nation. Without
taxes, the government would be paralyzed for lack
of motive power to activate and operate it. Hence,
despite the natural reluctance to surrender part of
one’s earned income to the taxing authorities,
every person who is able must contribute his share
in the running of the government. (CIR vs. Algue)
Manifestations:
 Imposition even in the absence of
constitutional grant
 State’s right to select objects and subjects
of taxation
 No injunction on collection of taxes
National Government vs. Local Government
Units
 National Government – inherent
 LGU – not inherent; can only impose taxes
when there is:
a. constitutional grant
b. legislative grant
2. Legislative in Character
Only the legislature can impose taxes.
It is based upon the principle that taxes are a
grant of the people who are taxed, and the grant
must be made by the immediate representatives
of the people. And where the people have laid their
power, there it must remain and be exercised’.
(Cooley)
NOTE: The power to tax is primarily vested in
Congress. However, in our jurisdiction, it may be
exercised by local legislative bodies, no longer
merely by virtue of a valid delegation as before,
but pursuant to a direct authority conferred by
Section 5, Article X of the Constitution (Mactan
Cebu International Authority vs. Marcos, G.R. No.
120082, September 11, 1996).
Scope of Legislative Power (SM-PARKS)
a. Subjects of taxation (persons, property,
occupation, excises or privileges to be taxed,
provided they are within the taxing
jurisdiction)
b. Amount or Rate of tax
c. Purposes for which taxes shall be levied
provided they are for public purpose
d. Kind of tax to be collected
e. Apportionment of the tax (whether the tax
shall be of general application or limited to a
particular locality, or partly general and
partly local)
f. Situs of taxation
g. Method of collection
Extent or Scope of Taxing Power (CUPS)
a. Comprehensive - It covers persons,
businesses, activities, professions, rights and
privileges.
b. Unlimited - The power to impose taxes is one
so unlimited in force and so searching in
extent that the courts scarcely venture to
declare that it is subject to any restrictions
 2 |TAXATION LAW REVIEWER

whatever, except such as rest in the discretion use of

of the authority which exercises it. property
c. Plenary - It is complete. As To Benefits
d. Supreme - Only that it is supreme insofar as Presumption of No direct and The person
the selection of the subject is concerned. receipt of immediate affected receives
benefits to benefits just
every person received by compensation
3. Subject to Constitutional and Inherent the person from the
Limitations affected property taken
from him
It is not an absolute power that can be exercised As To Amount Of Imposition
by the government. (Refer to discussion under No limit Sufficient to No imposition,
Scope and Limitations). cover cost of the person is
regulation paid the FMV of
his property
POWER OF TAXATION COMPARED As To Relationship To The Constitution
It is inferior to Superior to Superior and
WITH OTHER POWERS the “Non- the “Non- may override the
impairment impairment” “Non-
Power of clause”. The clause impairment”
Power of power of clause because
Police Power Eminent
Taxation taxation cannot the welfare of
Domain be exercised to the State is
Definition impair the superior to any
It is the power It is the It is the power to “Obligations private contract
to take property power to take private and Contracts”
for the support enact laws to property for clause
of the promote the public use upon
government and general payment of just As To Limitation
for public welfare of the compensation. The exercise is Limited to Limited to public
purpose people. It is constitutionally public purpose and just
wider in and inherently interest and compensation
application limited or the
because it is restricted requirement
the general of due
power to process
make laws.

As To Purpose
Revenue and Property is Property is PRINCIPLES OF SOUND TAX SYSTEM
support of the taken for taken for public (FAT)
government public use use
A. FISCAL ADEQUACY:
As To The Authority That Exercises The Sources of revenue must be adequate to meet
Power expenditures. It must be able to provide
Government Government Government or sufficient revenues in order to meet the
private
legitimate objects of the government.
individuals or
corporations Violations of this principle will make the law
As To Necessity Of Delegation unsound but still valid and constitutional.
No delegation There must There must be
is necessary be due due delegation  "An approximate estimate of government
because it is delegation before the local expenditures" is sometimes sufficient to
inherent before the government or satisfy the requirement.
local private party
government may exercise it B. ADMINISTRATIVE FEASIBILITY:
may exercise The tax law must be capable of convenient,
it
just, effective and efficient enforcement and
As To Persons Affected
administration. This principle equally
Community of Community Operates on the
class of of class of owner of the
applies to taxpayers. Violation of this
individuals individuals property principle will make the law unsound but still
As To Effect Of Transfer Of Property Rights valid and constitutional.
Money paid as There is no There is transfer
taxes becomes transfer of of right to C. THEORETICAL JUSTICE:
part of public title, at most property Taxes must be based on the taxpayer’s ability
funds there is whether it be of to pay and proportional to the relative value
restraint on ownership or of the property. The Constitution provides
the injurious property right that taxation must be uniform and equitable.
The State must evolve a progressive system of

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012


taxation. Violation of this principle will make
the law unsound, invalid and
unconstitutional.
THEORY AND BASIS OF TAXATION
1. LIFEBLOOD THEORY
Taxes constitute the lifeblood of the nation
and are greatly needed to support the
government and its widely expanding services
to the people. Without taxes, the government
would be paralyzed for lack of motive power
to activate and operate it.
This implies that:
a. The BIR is justified in availing of the
most expedient remedy in the collection
of the tax. (CIR vs. Pineda, 21 SCRA 105)
b. The BIR is not bound by the mistakes,
errors, or omissions of its agents (thus,
the doctrine of estoppel does not apply to
the collection of taxes). (Vera vs.
Fernandez 89 SCRA 199)
c. No court other than the Court of Tax
Appeals (CTA) may enjoin the collection
of taxes.
Principles that flow from the Lifeblood Theory:
a. Power to tax is an unlimited and plenary
power.
b. The power to tax includes the power to
destroy.
Two Views:
1. Marshall Dictum: “The power to tax is the
power to destroy.” Due to the inherent and
unlimited nature of the power to tax, it
includes the power to regulate even to the
extent of prohibition or destruction. It applies
when power to tax is used validly as an
implement of police power in discouraging
and prohibiting certain things or enterprises
inimical to the public welfare.
Marshall Dictum has no application to a
lawful tax. This is pertinent only when there
is no power to tax a particular subject and it
has no relation to a case where such right
exists, because the power to destroy may be a
consequence of taxation, but it cannot tax to
the point of confiscation.
2. Holmes Dictum: “The power to tax is not the
power to destroy while this Court sits.” The
power to tax is unlimited except when it runs
counter the constitutional provisions. In such
case, the court may declare and hold such act
as unconstitutional.
Reconciliation of Marshall and Holmes Dicta:
The power to tax, though unlimited, must not
be exercised in an arbitrary manner.
Taxpayers may seek redress before the courts
3
in case of illegal imposition of taxes and
irregularities. But where the power to tax is
used solely for the purpose of raising
revenues, the modern view is that it cannot be
allowed to confiscate or destroy.
c. The presumption that tax laws are valid.
d. The right to collect taxes is imprescriptible.
e. Collection of taxes may not be enjoined by
injunction.
f. Taxes could not be the subject of
compensation and set-off.
While taxes are the lifeblood of the government
and should be collected without unnecessary
hindrance, such collection should be made in
accordance with law as any arbitrariness will
negate the very reason for government itself.
(Marcos II vs. Court of Appeals, 273 SCRA 47)
2. NECESSITY THEORY
Taxation is a power predicated upon
necessity. It is a necessary burden to preserve
the State’s sovereignty. (Phil. Guaranty Co.
vs. Commissioner, 13 SCRA 775)
Taxation proceeds upon the theory that:
 The existence of the government is a
necessity;
 It cannot continue without means to pay
its expenses;
 This means it has the right to compel all
its citizens and property within its limits
to contribute. (71 Am. Jur. 2d 346)
3. BENEFITS-PROTECTION THEORY
In return for the taxes received, the
government only secures to the citizen that
general benefit which results from protection
to his person and property and the promotion
of those various schemes which have for their
object the welfare of all.
This theory spawned the doctrine of symbiotic
relationship:
Taxes are what we pay for a civilized society.
Without taxes, the government would be
paralyzed for lack of motive power to activate
and operate it. Thus, despite the natural
reluctance to surrender part of one’s hard-
earned income to the taxing authorities, every
person who is able must contribute his share
in running the government. The government,
for its part, is expected to respond in the form
of tangible and intangible benefits intended to
improve the lives of the people and enhance
their moral and material values (CIR vs.
Algue, 158 SCRA 9).
 4 |TAXATION LAW REVIEWER
DOCTRINES IN TAXATION
PROSPECTIVITY OF TAX LAWS
(Doctrine of Non-retroactivity of Laws)
Tax laws are prospective in character and in
application.
Exceptions:
a. The retroactive application is necessarily
implied from the language used.
b. It involves income tax.
c. The retroactive application is clearly the
intent of the Congress.
When the tax law imposes a criminal liability, it
cannot be given retroactive effect because that
would violate the ex post facto law. But if it
imposes civil penalties like fines and forfeiture, it
can be given retroactive effect unless it produces
harsh consequences, its validity may be
questioned on grounds of equity and due process.
Rule on non-retroactivity of rulings under the
NIRC. Any revocation, modification or reversal of
any of the rules and regulations promulgated in
accordance with the Sections the NIRC or any of
the rulings or circulars promulgated by the
Commissioner shall not be given retroactive
application if the revocation, modification or
reversal will be prejudicial to the taxpayers,
except in the following cases:
DeDiBad
1. Where the taxpayer Deliberately
misstates or omits material facts from his
return or any document required of him
by the Bureau of Internal Revenue;
2. Where the facts subsequently gathered
by the Bureau of Internal Revenue are
materially Different from the facts in
which the ruling is based; or
3. Where the taxpayer acted in Bad faith.
(Sec. 246, NIRC)
IMPRESCRIPTIBILITY
As a rule, taxes are imprescriptible as they are the
lifeblood of the government. However, tax statutes
may provide for statute of limitations.
The rules that have been adopted are as follows:
a. National Internal Revenue Code – The statute
of limitation for assessment of tax if a return is
filed is within three (3) years from the last day
prescribed by law for the filing of the return or
if filed after the last day, within three years
from the date of actual filing. If no return is
filed or the return is false or fraudulent, the
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
period to assess is within ten (10) years from
discovery of the omission, fraud or falsity.
b. Tariff and Customs Code – It does not express
any general statute of limitation. It provides,
however, that when articles have been entered
and passed free of duty of final adjustments of
duties made, with subsequent delivery, such
entry and passage free of duty or settlements
of duties will, after the expiration of three (3)
years from the date of the final payment of
duties, in the absence of fraud or protest or
compliance audit pursuant to the provisions of
this code be final and conclusive upon all
parties, unless the liquidation of the import
entry was merely tentative.
c. Local Government Code – Local taxes, fees, or
charges shall be assessed within five (5) years
from the date they become due. In case of
fraud, or intent to evade the payment of taxes,
fees, or charges, the same may be assessed
within ten (10) years from discovery of such.
They shall also be collected either by
administrative or judicial action within five (5)
years from the date of assessment.
DOUBLE TAXATION
Kinds of Double Taxation:
1. Direct duplicate taxation – double taxation in
its strict sense and is prohibited because of
the violation of the constitutional precepts of
equal protection and uniformity in taxation.
It means (elements/requisites) -
1. taxing same SUBJECT (person,
property or right) twice
2. for the same PURPOSE
3. by the same taxing AUTHORITY
4. within the same JURISDICTION or
taxing district
5. within the same taxable PERIOD
6. and they must be of the same KIND
or character of tax
2. Indirect duplicate taxation – double taxation
in its broad sense and is permissible. This
exists when one or more of the foregoing
requisites is/are not present.
International Juridical Double Taxation -
refers to the imposition of comparable taxes in
two or more states on the same taxpayer in
respect of the same subject matter and for
identical periods.
 This occurs when a person is resident of
one country/ state and derives income
from (or owns capital in) another
country/state and both countries/states
impose taxes on such income (or capital).

 This occurs only when the state of
residence of the taxpayer imposes tax on
the income from sources within and
without. Therefore, only resident citizens
and domestic corporations may be
subjected to international juridical
double taxation.
 A tax treaty is normally entered into by
two contracting states to eliminate this.
Remedies of Double Taxation:
(CD – RET)
1. Tax Credits – an amount subtracted from an
individual’s or entity’s tax liability to arrive at
the total tax liability.
2. Tax Deductions – tax write-off or reduction in
the gross amount on which a tax is calculated.
3. Reduction of the Philippine income tax rate
Ex. Tax Sparing Rule
4. Tax Exemptions – a grant of immunity to
particular persons or corporations from the
obligation to pay taxes.
5. Tax Treaties – agreement between two
countries specifying what items of income will
be taxed by the authorities of the country
where the income is earned.
Most Favored Nation Clause (MFN) in Tax
Treaties
The purpose of the MFN clause is to grant to the
contracting party treatment not less favorable
than that which has been or may be granted to the
“Most Favored” among other countries.
The MFN Clause is intended to establish the
principle of equality of international treatment by
providing that the citizens or subjects of the
contracting nations may enjoy the privileges
accorded by either party to those of the most
favored nation.
To invoke the application of the “most favored
nation” MFN clause, the subject matter of the
other tax treaty should be the same as that in the
tax treaty under which the taxpayer is liable.
(Commissioner of Internal Revenue vs. S.C.
Jhonson & Son, Inc., 309 SCRA 87 [1999])
FORMS OF ESCAPE FROM TAXATION
A. Shifting
B. Capitalization
C. Transformation
D. Avoidance
5
E. Evasion
F. Exemption
A. SHIFTING
It is the process by which tax burden is
transferred from statutory taxpayer (impact of
taxation) to another (incident of taxation) without
violating the law.
Ways of Shifting the Tax Burden:
a. Forward Shifting – the burden of the tax
is transferred from a factor of production
through factors of distribution until it
finally settles on the ultimate purchaser
or consumer.
b. Backward Shifting – the burden of the
tax is transferred from the consumer or
purchaser through the factors of
distribution to the factor of production.
c. Onward Shifting – the tax is shifted two
or more times either forward or
backward.
Only indirect taxes may be shifted; direct taxes
cannot be shifted.
Impact of Taxation - point on which tax is
originally imposed.
Incidence of Taxation - point on which the tax
burden finally rests or settles down
Statutory Incidence vs. Economic Incidence
(impact of taxation)
The statutory incidence of a tax is who the law
says pays the tax while the economic incidence of
a tax or burden is who really bears the tax. Where
the burden of the tax is shifted to the purchaser,
the amount passed on to it is no longer a tax but
becomes and added cost on the goods purchased,
which constitutes a part of the purchase price.
B. CAPITALIZATION
It is the reduction in the price of the taxed object
equal to the capitalized value of future taxes
which the purchaser expects to be called upon to
pay.
C. TRANSFORMATION
It happens when the manufacturer or producer
upon whom the tax has been imposed, fearing the
loss of his market if he should add the tax to the
price, pays the tax and endeavors to recoup
himself by improving his process of production,
thereby turning out his units at a lower cost.
D. TAX AVOIDANCE
It is the legal or permissible means to reduce tax
liability through maximization of deductions,
exclusions and exemptions and minimization of
income.
 6 |TAXATION LAW REVIEWER

a. It may be based on a contract

E. TAX EVASION b. It may be based on grounds of public policy-
It is the illegal or fraudulent means to defeat or granting tax exemptions to Rural banks and
lessen payment of tax. sweepstakes or lotto winnings
c. It may be based on some grounds to foster
A scheme outside of those lawful means and when charitable and other benevolent institutions
availed of, it usually subjects the taxpayer for d. It may be created under a treaty on grounds
further or additional civil or criminal liability. of reciprocity
e. It may be created to lessen the rigors of
Elements of Tax Evasion: international double or multiple taxation
a. The end to be achieved, i.e., the payment of
less than that known by the taxpayer to be An exemption from “all taxes” excludes indirect
legally due; taxes, unless the exempting statute is so couched
b. An accompanying state of mind which is as to include indirect tax from the exemption.
described as being evil, in bad faith or
deliberate; Tax deductions for income tax purposes partake of
c. A course of action or failure of action which is the nature of tax exemptions and are strictly
unlawful. (CIR vs. Estate of Benigno P. Toda, construed against the taxpayer, who must prove
September 14, 2004). by convincing evidence that he is entitled to the
deduction claimed. (Philex Mining Corp. vs. CIR,
Tax Avoidance Tax Evasion 551 SCRA 428)
(Tax (Tax
Minimization) Dodging) Q: Is an exemption granted under the
Constitution self-executing?
Legality Legal and not Illegal and
A: It can be self-executing or the Congress may
subject to criminal subject to
require an act for its application.
penalty criminal
penalty
If self-executing, the legislature cannot add or
Effect Minimization of Almost
detract from it. It may however prescribe
taxes always
procedures to determine whether a claimant may
results in
enjoy the said tax exemption privilege.
non-payment
of taxes
Grant Of Tax Exemptions
General Rule: “No law granting any tax
exemption shall be passed without the
F. TAX EXEMPTION
concurrence of a majority of all the members of
It is a grant of immunity, expressed or implied, to
Congress.” (Art. VI, Sec. 28[4] of the 1987
particular person or corporation or to persons or
Constitution)
corporations of a particular class from a tax upon
property or an excise which persons or
Rule on Construction of Exemption:
corporations generally within the same taxing
1. Exemptions from taxation are not presumed.
district are obliged to pay. (51 Am. Jur. 503)
2. He who claims as exemption must be able to
justify his claim by the clearest grant of
Nature of Tax Exemption:
organic or statute law by words too plain to be
1. It is a mere personal privilege of the grantee.
mistaken. If ambiguous, there is no exemption.
2. It is generally revocable by the government
3. He who claims exemption should prove by
unless the exemption is founded on a contact
convincing proof that he is exempted.
which is protected from the impairment.
4. Taxation is the rule; an exemption is the
3. It implies a waiver on the part of the
exception.
government of its right to collect otherwise
5. Tax exemption must be strictly construed
would be due it, and is so prejudicial thereto.
against the taxpayer and liberally in favor of
4. Need not be discriminatory, it only needs to
the taxing authority (Mactan Cebu
have a reasonable foundation or rational basis.
International Airport Authority vs. Marcos,
261 SCRA 667).
Kinds Of Tax Exemptions:
6. Constitutional exemption is self-executing.
As to basis:
7. Tax exemptions are personal.
1. Constitutional: immunities from taxation which
originates from the constitution.
Strict Construction Rule
2. Statutory: those which emanate from
It simply means that if, after the application of all
legislation.
rules of interpretation for the purpose of
ascertaining the intention of the legislature, a well
founded doubt exists, then, the ambiguity
Grounds For Tax Exemption:

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012


that occurs may be settled by the rule of strict
construction.
Exceptions:
a. The rule on strict construction does not apply
where the statute granting the exemption
expressly provides for liberal interpretation.
b. The rule does not apply to special taxes
relating to special cases and affecting only
special classes of persons.
c. In case of property owned by the state an
express exemption should not be construed
with the same degree of strictness that applies
to exemptions contrary to public policy of the
state, since as to such property, “exemption is
the rule and taxation the exemption”.
d. Exemptions to traditional exemptees, such as
religious and charitable institution.
e. The rule does not apply in the case of exemptions
in favor of governmental political subdivision or
instrumentality. (Maceda vs. Macaraig, Jr., 197
SCRA 771)
f. If the tax payer falls within the purview of
exemption by clear legislative intent. (CIR vs.
Arnoldus Carpentry Shop, G.R. No. 71122,
March 25, 1988)
Revocation of Tax Exemption
Since taxation is the rule and exemption is the
exception, the exemption may thus be withdrawn
at the pleasure of the taxing authority. (Mactan
Cebu Int’l. Airport Authority vs. Marcos)
Tax exemption is a mere privilege of the grantee,
thus, revocable unless founded on a contract. (p.
74, Review Notes and Outlines in Taxation, Lim.
2008 Ed.)
Tax exemption may be granted by contracts
Those that are so granted are protected by the
“Non-impairment Clause” of the constitution. (Ex.
Government bonds)
 Whenever a valid contract is entered into
between the contracting parties, even the
state is prohibited from impairing said
contract. However, police power is superior to
the impairment clause of the Constitution,
whereas, taxation is inferior to the non-
impairment clause.
Tax exemption granted by means of a legislative
franchise is revocable.
Limitations on Revocation:
a. Where the exemption was granted to private
parties based on material consideration of a
mutual nature, it then becomes contractual
and is covered by the non-impairment clause of
the Constitution.
7
b. If the tax exemption is granted by the
Constitution, its revocation may be effected
through constitutional amendment only.
c. Where the tax exemption grant is in the form
of a special law and not by a general law even
if the terms of the general act are broad enough
to include the codes in the general law unless
there is manifest intent to repeal or alter the
special law. (Province of Misamis Oriental vs.
Cagayan Electric Power and Light Co. Inc
GRN No. 45355, Jan. 12, 1990)
COMPENSATION AND SET-OFF
General Rule: No set-off is admissible against the
demands for taxes levied for general or local
governmental purposes.
Rationale:
1. Lifeblood theory
2. Taxes are not contractual obligations but
arise out of duty to the government.
3. The government and the taxpayers are
not mutually creditors and debtors of
each other.
Exception: When both the claim of the government
for taxes and the claim of the taxpayer for the
services rendered had already become overdue
and demandable as well as fully liquidated,
COMPENSATION therefore, takes place by
operation of law. (Domingo vs. Garlitos, 8 SCRA
443)
Doctrine of Equitable Recoupment
A claim for refund barred by prescription may be
allowed to offset unsettled tax liabilities arising
from the same transaction.
The SC rejected this doctrine in Collector vs. UST
(104 Phil 1062), since it may work to tempt both
parties to delay and neglect their respective
pursuits of legal action within the period set by
law.
COMPROMISE
It is an agreement between two or more persons,
to avoid lawsuit, amicably settle their differences
on such terms as they can agree on.
TAX AMNESTY
It is a general pardon or intentional overlooking
by the State of its authority to impose penalties on
persons otherwise guilty of tax evasion or
violation of tax law. The purpose is to give the
erring taxpayer a chance to reform and become
part of the society with a clean slate. (p. 77, Lim.
Review Notes and Outlines in Taxation, 2008 Ed.)
Tax amnesty is granted to erring taxpayers and
not available to agents of the Tax Bureau.
 8 |TAXATION LAW REVIEWER

2. Civil in nature. Hence, not subject to ex post

TAX EXEMPTION vs. TAX AMNESTY facto law prohibitions;
3. Not penal in character.
TAX EXEMPTION TAX AMNESTY
There is immunity Connotes RULES ON CONSTRUCTION OF TAX LAWS
from tax. condonation from
payment of an 1. Generally, no person or property is subject to
existing liability. tax unless within the terms or plain import of
The grantee does not The grantee pays a a taxing statute.
pay anything. portion. 2. Tax laws are generally prospective in
Can be availed by any Not always application.
qualified taxpayer. available.
It is prospective in It is retroactive in Exception: While it is not favored, a statute
application. application. may nevertheless operate retroactively
Tax liability does not Tax liability provided it is expressly declared or is clearly
attach top one enjoying attaches to a the legislative intent. (Cebu Portland Cement
a privilege of tax taxpayer who wants vs. Coll. G.R. No. 18649, Feb. 27, 1965)
exemption. to avail of tax
amnesty. 3. Where the language is clear and categorical,
Requires no payment Requires the the words employed are to be given their
of tax. payment of certain ordinary meaning.
percentage of unpaid 4. When there is doubt, tax statutes are
taxes. construed most strongly against the
Immunity from civil Immunity from civil, Government and liberally in favor of the
liability. criminal and citizen because burdens are not to be imposed
administrative beyond what the statutes expressly and
liability. clearly import (Collector of Internal Revenue
vs. La Tondena, Inc., et al., L-10431, 31 July
Rules on Tax Amnesty 1962).
1. Tax amnesty 5. Provisions of the taxing act are not to be
extended by implication.
a. like tax exemption, it is never favored nor 6. Tax laws are special laws and prevail over
general laws.
presumed
7. It must be given reasonable construction with
b. construed strictly against the tax payer
the view of carrying out their purpose and
(must show complete compliance with the
law) intent.
8. It must be construed to avoid the possibilities
2. Government not stopped from questioning the of tax evasion;
tax liability even if amnesty tax payments
RULES ON CONSTRUCTION OF TAX
were already conceived.
EXEMPTIONS
Reason: Erroneous application and
enforcement of the law by public officers do General Rule: Laws granting tax exemption are
not block subsequent correct application of construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing
the statute. The Government is never stopped
power.
by mistakes or error of its agents.
Exceptions:
Basis: Lifeblood Theory
1. When the statute granting exemption
provides for the liberal construction thereof;
3. Defense of tax amnesty is a personal defense.
2. In case of special taxes relating to special
cases and affecting only special classes of
Reason: Relates to the circumstances of a
persons;
particular accused and not the character of
3. If exemptions refer to the public property
the acts charged in the information.
4. In cases of exemptions granted to religious,
charitable and educational institutions or
CONSTRUCTION AND INTERPRETATION OF their property;
TAX LAWS 5. In cases of exemptions in favor of the
government, its political subdivisions or
Nature of Tax Laws instrumentalities.
1. Not political in character. They are deemed to
be the laws of the occupied territory and not NOTE: The intent of the legislature to grant tax
of the occupying enemy. exemption must be in clear and unmistakable
terms. Exemptions are never presumed. The

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 9

Where a statute is susceptible of the meaning

placed upon it by a ruling of the government
burden of establishing right to an exemption is
upon the claimant. agency charged with its enforcement and the
legislature thereafter reenacts the provisions
RULES ON CONSTRUCTION OF TAX RULES without substantial change, such action is to some
AND REGULATIONS extent, confirmatory that the ruling carries out
the legislative purpose. (Alexander Howden case
Tax Regulations Tax Rulings supra)
They are promulgated Issued only upon
by the Secretary of query by a taxpayer.
Finance in order to They are the best SCOPE AND LIMITATION OF TAXATION
implement the guess of the moment
provisions of the Tax and incidentally often Scope of Taxation
Code. contain such well-
considered and sound The power to tax is (CUPS)
law; but the courts 1. Comprehensive,
have held that they 2. Unlimited,
are merely advisory – 3. Plenary, and
sort of an information 4. Supreme
service to the (Judge Cooley)
taxpayer. (Quiazon
and Lukban, op cit.) “Wide Spectrum of Taxation”
It is one that extends to every business, trade or
General Rule: The construction placed by the occupation; to every object of industry; use or
office charged with implementing and enforcing enjoyment; to every species of possession; it
the provisions of a Code should be given imposes a burden which in case of failure to
controlling weight unless such interpretation is discharge the same may be followed by the seizure
clearly erroneous. and confiscation of property after the observance
of due process.
RULE ON CONSTRUCTION OF PENAL
PROVISIONS OF TAX LAWS The power to tax is unlimited in force and so
searching in extent. (Tio vs. Videogram)
Penal provisions are given strict construction so as Unlimited in force jibes with the pronouncement
not extend the plain terms thereof that might of the court in Sison vs. Ancheta: The State is free
create offenses by mere implication not so to select the object or subject of taxation. It is the
intended by the legislative body. (RP vs. Martin) inherent power of the state to select the object of
taxation.
INTERPRETATION OF “NON-RETROACTIVE
APPLICATION TO TAXPAYERS” The power or taxation is the strongest power of the
government. It is superior when it comes to the
General Rule: Rulings are not retroactive if they imposition of tax and in determining the object of
are prejudicial to the taxpayer. taxation. The power of eminent domain and police
power cannot interfere as regards the
Exceptions: determination of the object of taxation. (Sison vs.
a. Where the taxpayer deliberately Ancheta)
misstates or omits material facts from his
return or any document required of him Two-Fold Nature of Taxation
by the Bureau of Internal Revenue; -Inherent in character
b. Where the facts subsequently gathered -Legislative in character
by the Bureau of Internal Revenue are
materially different from the facts on
which the ruling is based; or Limitations of Taxation (Quick Glance)
c. Where the taxpayer acted in bad faith.
Inherent Limitations - proceeds from the very
 Rulings which merely embody administrative nature of the taxing power itself. They are
opinions on queries submitted do not have the otherwise known as “elements/characteristics
force and effect of laws. (Alexander Howden of taxation”.
and Co., Ltd. vs. CIR, L-19392, April 14, 1965)
1. Public purpose
Principle of Legislative Approval of an 2. Inherently legislative
Administrative Interpretation through 3. Territorial
Reenactment. 4. International Comity
 10 |TAXATION LAW REVIEWER

5. Exemption of the Government b. Promotion of the General Welfare Test -

When the proceeds of the tax will directly
Constitutional Limitations-restrictions promote the welfare of the community in
imposed by the Constitution. equal measure

A. Specific or Direct NOTE: Incidental advantage to the public or

1. Prohibition against imprisonment for non- to the State, which results from the promotion
payment of poll tax; of private enterprise or business, does not
(Sec. 20, Art. III, Constitution) justify their aid by the use of public money.
2. Uniformity and equality of taxation;
(Sec. 28(1), Art. IV) The power to determine whether the purpose
3. Progressive system of taxation; of taxation is public or private resides in
(Sec. 28(1), Art. IV) Congress. However, this will not prevent the
4. Grant by Congress of authority to the court from questioning the propriety of such a
President to impose tariff rates; statute on the ground that the law enacted is
(Sec. 28(2), Art VI) not for public purpose; but once it is settled
5. Origin of revenue and tariff bills; that the law is for a public purpose, the court
(Sec. 24, Art VI) may no longer inquire into the wisdom,
6. Veto power of the President; expediency or necessity of such tax measure.
(Sec. 27(2), Art. VI)
7. Prohibition against taxation of religious,
charitable entities, and educational It is the purpose which determines the public
entities; (Sec 28, par 3, Art. VI) character of the tax law, not the number of
8. Majority vote of Congress for grant of tax persons benefited. As long as the ultimate
exemption; result favors the welfare of the public in
(Sec 28 (6),Art.VI) general, the appropriation of public revenue is
9. No use of public money or property for deemed done for the public purpose.
religious purposes;
(Sec 28, par. 3, Art. VI) Public purpose must exist at the time the tax
10. Special assessments; proceeds are being used or a tax law is being passed
(Sec. 29, par 3, Art. VI) for a certain purpose, whichever comes first.
11. Non Impairment of Jurisdiction of the (Pascual vs. Sec. of Public Works)
Supreme court;
(Section 5 (2) (b), Art.VIII) Taxpayers’ Suit – requires illegal expenditure of
12. Grant of power to Local Government Units public money.
to create its own sources of revenue;
(Secs. 5 &6, Art. X) Requisites of taxpayer’s suit:
13. Prohibition against taxation of non-stock, a. That the tax money is being extracted and
non-profit institutions; spent in violation of specific constitutional
(Sec. 4 (3 and 4) Art. XIV) protection against abuses of legislative power;
b. That public money is being deflected to any
B. General or Indirect improper purpose;
1. Due process clause; c. That the petitioner seeks to restrain the
(Sec. 1, Art. III) respondents from wasting public funds
2. Equal protection clause; through enforcement of an invalid or
(Sec. 1, Art. III) unconstitutional law.
3. Religious freedom;
(Sec. 5, Art. III) However, the SC has discretion as to whether
4. Non-impairment clause; or not to entertain a taxpayer’s suit and could
(Sec. 10, Art. III) brush aside the lack of locus standi where the
issues are of transcendental importance in
keeping with the court’s duty to determine
that public offices have not abused the
INHERENT LIMITATIONS discretion given to them. (Kilosbayan vs.
(PITIE) Guingona, 232 SCRA 110)

1. PUBLIC PURPOSE
2. INHERENTLY LEGISLATIVE
Tests to determine whether or not taxation is
for public purpose: General Rule: Power of taxation is vested in
a. Duty Test - The thing to be furthered by Congress and may not be delegated by it based
the appropriation of public revenue is on the doctrine of separation of powers.
something which is the duty of the
government to provide;

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012

 11

d. Subject matter of the tax (person, property,

Exceptions: rights or activity);
a. Delegation to Local Governments. e. Citizenship of the taxpayer; and
Local taxing power granted by the f. Nature, kind or classification of the tax being
Constitution (Art. X, Sec. 5, 1987 imposed.
Constitution). Local governments shall
have to create its own sources of revenues
and to levy taxes, fees, and other charges GENERAL RULES OF TAX SITUS
subject to limitations Congress may
provide, which shall accrue exclusively to Situs of Income Taxation
the local governments.
Sources of Income Taxpayers
Under the Doctrine of Implied Necessity, Income RC/DC/Estate NRC/Aliens/F
the power to create municipal Earned: s/ C
corporations carries with it by necessary
Trusts
implication the power to compel upon it
Within Taxable Taxable
the power to tax.
Without Taxable Nontaxable
In case of doubt as to whether the LGU Partly Taxable Partly taxable
has the power to tax or not, all doubts within and
must be resolved in favor of the existence without
of such power. This is not the rule RC- NRC – Nonresident Citizens
without such provision in the Resident FC – Foreign Corporations
Constitution. Citizens
DC-
b. Delegation to the President Domestic
 to fix tariff rates, import and export Corporation
quotas (Art. VI, Sec. 28[2], 1987 s
Constitution);
 emergency powers (Art VI, Sec 23 [2] Source Rules in Determining Income from Within
1987 Constitution); and Without
 to enter into executive agreement, Quick Glance
and to ratify treaties which may Type
contain tax exemption provisions Interest Residence of the
subject to the concurrence by the debtor
Senate in the ratification made by Income of merchandising Place of sale
the President. business
Services or compensation Place of
c. Delegation to Administrative Agencies income performance of
(The power of subordinate legislation) service
It must comply with a set of sufficient
Rentals Location of
standards expressed by law.
property, real or
personal
3. TERRITORIAL
Royalties Place of use of
intangibles
Situs of taxation
Sale of real property Location of
It means the “place of taxation”, is a limitation on
property
the taxing power. This is so because however
broad the power of taxation may be as to its Sale of personal property Place of sale
character and no matter how searching it is in its Sale of shares of stock of Within Phils.
extent, such power is necessarily limited only to domestic corporation
persons, property or businesses within its
jurisdiction; that is to say, to subjects within its
The following taxpayers are taxed from their
jurisdiction, or over which it can exercise
income that is exclusively within the Philippines:
dominion. (Shaffer vs. Carter, 252 U.S. 37)
a. Non-Resident Citizens;
The following factors are determinants to the situs b. Resident Aliens;
of taxation: c. Non-Resident Aliens Engaged in Trade or
Business;
a. Place of the excise, privilege, business or
d. Non-Resident Aliens Not Engaged in Trade or
occupation being taxed;
Business;
b. Source of the income being taxed;
c. Residence of the taxpayer; e. Special Aliens;
f. Resident Foreign Corporations; and
g. Non-Resident Foreign Corporations.
 12 |TAXATION LAW REVIEWER
The following taxpayers are taxed from their
income within and without the Philippines:
a. Resident Citizens;
b. Estates under Judicial Settlement;
c. Irrevocable Trust;
d. Co-ownership; and
e. Domestic Corporations.
 Situs of Property Taxes
Real Property
It is subject to taxation in the state or country where
it is located (lex rei sitae), regardless of whether the
owner is a resident or a non-resident. [First National
Bank vs. Marine, 284 U.S. 321.]
Personal Property
The situs is wherever it was actually kept or
located (lex rei sitae), or it was held to be the
domiciled of its owner, following the age-old
Doctrine of Mobilia Sequuntur Personam
(movables follow the person).
 Situs of Excise Tax
Estate Tax – is subject to taxation in the place
where the decedent is last domiciled.
Donor’s Tax – is subject to taxation in the place
where the donor is domiciled at the time of
transfer.
A Resident Decedent/Donor is taxed on all their
properties (whether real or personal) located
within and without the Philippines.
A Non-Resident Decedent/Donor is taxed on their
real and tangible personal properties located
within the Philippines. Their intangible personal
properties are taxed only if they are located within
the Philippines unless exempted on the basis of
the Principle of Reciprocity.
 Situs of Business Taxes
Sale of Real property – is taxed on the place where
the real property is located.
Sale of Personal property – is taxed on the place
where the sale took place.
Value-Added Tax – follows the Destination
Principle also referred to as the Cross Border
Doctrine. No VAT shall be imposed to form part of
the cost of the goods destined of consumption
outside the territorial border of the taxing
authority. Hence, goods are taxed only in the
country where these are consumed.
Franchise Tax – is taxed on the country that
granted the franchise.
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
Corporate Taxes – is taxed on the country where
the corporation is organized.
4. INTERNATIONAL COMITY
The property or income of a foreign state or
government may not be the subject of taxation
by another.
This is based on:
a. The Latin maxim, In par parem non habet
imperium. As between equals there is no
sovereign. Taxation is a high perogative of
sovereignty, hence may not be imposed
upon foreign sovereigns.
b. The rule of international law may not be
sued without its consent so that it is
useless to impose a tax which could not be
collected.
c. The concept that when a foreign sovereign
enters the territorial jurisdiction of
another, it does not subject itself to the
jurisdiction of the other.
DOCTRINE OF SOVEREIGN EQUALITY
(In par parem non habeat imperium)
This means that the property or income of a
foreign state may not be the subject of taxation by
another.
 Thus, if a tax law violates certain
international laws, it is not only invalid but it
is also unconstitutional because the
Constitution says "the Philippines adopts the
generally accepted principles of international
law as part of the law of the land."
5. EXEMPTION OF THE GOVERNMENT
ENTITIES, ANGENCIES AND
INSTRUMENTALITIES
General Rule: As a matter of public policy,
properties of the State or any of its political
subdivisions devoted to government use and
purposes are generally exempt from taxation.
Exception: When there is a law that says that
it is not exempt from tax.
Nothing can prevent Congress from decreeing
that even instrumentalities or agencies of the
government performing functions may be
subject to tax. (MCIAA vs. Marcos, 261 SCRA
667)
Agencies performing governmental functions
as a rule are tax exempt (by reason of public
policy) unless expressly subject to tax.
Agencies performing proprietary functions
are subject to tax unless expressly exempt.
(Posadas vs. Standard Well)
With respect to government properties, NDC
vs. Cebu City enunciated these principles:

1. Properties owned by the Republic of the
Philippines AND agencies without
separate and distinct personality are
exempt from taxation. In other words,
those agencies having their own charter
are treated for tax purposes in accordance
with the provisions of their respective
charters.
2. The exemption of public properties from
taxation does not extend to the
improvements introduced by the present
occupants at their expense.
CONSTITUTIONAL LIMITATIONS
PROVISIONS DIRECTLY AFFECTING
TAXATION
1. Non-Imprisonment for Non-Payment of Poll
Tax
“No person shall be imprisoned for non-
payment of a debt or poll tax.” (Art. III, Sec. 20,
1987 Constitution)
If acts violative of laws were committed in the
issuance and payment of the cedula or community
development tax, imprisonment is allowed.
2. Uniformity in Taxation
“The rule of taxation shall be uniform and
equitable.” (Art. VI, Sec. 28[1], 1987 Constitution)
Uniformity in taxation means that all articles or
properties of the same class shall be taxed at the
same rate. Different articles or other subjects like
transactions, business, rights, may be taxed at
different rates provided that the rate (not
necessarily the amount) is uniform in the same
class everywhere.
EQUALITY UNIFORMITY
Accomplished when A tax is considered
the burden of the tax uniform when it
falls equally and operates with the same
impartially upon all force/ effect in every
the persons and place where the subject
property subject to it may be found.
Equitability is All property belonging
achieved when the to the same class shall
burden of taxation be taxed alike.
falls to those who are
able to pay better.
Progressive System of Taxation
“Congress shall evolve a progressive system of
taxation.” (Art. VI, Sec. 28[1], 1987 Constitution) -
Tax rates increases as tax base increases.
13
The Constitutional provision which provides that
the Congress shall evolve a progressive system of
taxation is merely a directive to Congress, not a
right enforceable before the courts.
A tax adopting a regressive system of taxation is
valid. The Constitution does not really prohibit
the imposition of indirect taxes, which like the
VAT, are regressive. The Constitutional provision
simply means that indirect taxes shall be
minimized. The mandate of the Congress is not to
prescribe but to evolve a progressive tax system.
(EVAT en banc resolution, Tolentino, et al. vs.
Secretary of Finance, October 30, 1995)
1. President’s Derivative Power to Tax
The Congress may, by law, authorize the
President to fix within specified limits and subject
to such limitations and restrictions it may impose,
tariff rates, import and export quotas, tonnage
and wharfage dues and other duties or imports
within the framework of the national development
program of the government.” (Art. VIII, Sec.28 [2],
1987 Constitution)
2. Tax Exemption of properties actually,
directly, and exclusively used for religious,
charitable and educational purposes (Art. VI,
Sec.28 [3], 1987 Constitution)
The properties exempt from taxation under this
provision are cemeteries, churches, parsonages, or
convents appurtenant thereto. Exempted from
real property tax are lands, buildings and
improvements actually, directly and exclusively
used for religious, charitable or educational
purposes.
What is meant by actual, direct and exclusive use
of property for charitable, religious and
educational institutions is the direct and
immediate and actual application of the property
itself to the purposes for which the charitable
institution is organized. It is not the use of the
income from the real property that is
determinative of whether the property is used for
tax-exempt purposes. (St. Louis Men’s Christian
Association vs. Genher, 47 S.W. 2d77)
Doctrine of Usage
The rule remains that it is the USE and not the
ownership that determines the exempt character
of a property. What is meant by “use” remains a
litigious issue, but should always be measured
under the constitutional prescription of actually-
directly-exclusively purposes.
3. Tax Exemptions granted to Non-Stock, Non-
Profit Educational Institutions
All revenues and assets of non-stock, non-profit
educational institution used actually, directly and
 14 |TAXATION LAW REVIEWER

exclusively for educational purposes shall be

exempt from taxes and duties. (Art. XIV, Sec.4[ 3],
1987 Constitution)
Subject to the conditions prescribed by law, all
grants, endowments, donation or contributions
used actually, directly and exclusively for
educational purposes shall be exempt from tax.
(Art. XIV, Sec.4 [4], 1987 Constitution)
Each local government unit shall have the power
to create its own sources of revenues and to levy
taxes, fees and charges subject to such guidelines
and limitations as the Congress may provide,
consistent with the basic policy of local autonomy.
Such taxes, fees and charges shall accrue
exclusively to the local governments. (Art. X, Sec.
5, 1987 Constitution)

ART. XIV, Sec. 4(3) ART. VI, Sec. 28(3) Congress cannot abolish the local government’s
Grantee power to tax as it cannot abrogate what is
Non-stock, non- Religious, expressly granted by the fundamental law.
profit educational educational,
institution charitable 11. Flexible Tariff Clause
institutions
Taxes Covered This refers to the authority given to the president
Income tax, custom Property tax to adjust tariff rates under Section 401 of the
duties, property tax Tariff and Customs Code, which is the enabling
(DECS Order No. law that made effective the delegation of the
137-87) taxing power to the President under the
Constitution.
6. Grant of Tax Exemptions
PROVISIONS INDIRECTLY AFFECTING
General Rule: “No law granting any tax exemption TAXATION
shall be passed without the concurrence of a
majority of all the members of Congress.” (Art. VI, 1. Due Process of Law
Sec. 28[4] of the 1987 Constitution)
“No person shall be deprived of life, liberty or
Except: When a statue provides that certain property without due process of law.” (Art. III,
persons or property is immune from taxation. Sec.1, 1987 Constitution)

7. Special Fund Requisites of Due Process:

“All money collected on any tax levied for a special
purpose shall be treated as a special fund and paid
out for such purpose only. If the purpose for which
a special fund was created has been fulfilled or
abandoned, the balance, if any, shall be
transferred to the general funds of the
government.” (Art. VI, Sec. 29[3], 1987
Constitution)
8. Veto Power of the President
“The president shall have the power to veto any
particular item or items in an appropriation,
revenue or tariff bill but the veto shall not affect
the item or items to which he does not object.”
(Art.VI, Sec.27 [2], 1987 Constitution)
9. Non-impairment of Jurisdiction of the
Supreme Court
a. Substantive limitation – the interest of the
public generally as distinguished from those of
a particular class require the intervention of
the State; and
b. Procedural limitation – the means employed
must be reasonably necessary for the
accomplishment of the purpose and must not
be unduly oppressive.
However, due process is violated by any of these
situations: (VCORP)
a. Where the law is in violation of inherent
limitations;
b. If the tax amounts to a confiscation of property;
c. If the subject of confiscation is outside the
jurisdiction of the taxing authority;
d. If the law which is applied retroactively
imposes unjust and oppressive taxes;
e. If the law is imposed for a purpose other than
public purpose.

The Supreme Court may review, revise, reverse,
modify or affirm on appeal or certiorari as the law
or the Rules of court may provide all cases
involving the legality of any tax, impost,
assessment or toll, or any penalty imposed in
relation thereto. (Art. VIII, Sec. 5, 1987
Constitution)
2. Equal Protection of the Law
“…nor shall any person be denied the protection of
the laws. (Art. III, Sec.1, 1987 Constitution)
It merely requires that all persons subjected to
such legislation shall be treated alike, under like

10. Grant of Power of Taxation to Local

Government Units

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012


circumstances and conditions, both in the
privileges conferred and in the obligations
imposed.
Requisites for a Valid Classification (SPEG)
a. It must be based on substantial
distinctions.
b. It must apply to both present and future
conditions.
c. It must apply equally to all members of the
same class.
d. It must be germane to the purposes of the
law.
 Substantial distinction means it must be real,
material, and not superficial distinction. (Hiu
Tsong Pao case)
3. Taxation and the Freedom of Religion
“No law shall be made respecting an
establishment of a religion or prohibiting the free
exercise thereof. The free exercise and enjoyment
of religious profession and worship without
discrimination or preference shall forever be
allowed. No religious test shall be required for the
exercise of civil or political rights.” (Art. III, Sec.5,
1987 Constitution)
4. Non-Impairment Clause
“No law impairing the obligation of contracts shall
be passed.” (Art. III, Sec.10, 1987 Constitution)
The obligation or contract is impaired when its
items or conditions are changed by law or by a
party without consent of the other thereby
weakening the position of the latter.
Thus, there is impairment by law when a tax
exemption based on a contract is revoked by a
latter statute.
It may be well to point out that the non-
impairment clause will only be violated if and
when the taxing authority was a party to the
contract in question.
The rule, however, does not apply utility
franchises or rights since they are subject to
amendment, alteration, or repeal by the Congress
when the public interest so requires. (Cagayan
Electric and Light Co., Inc. vs. Commissioner,
G.R. No. 60216, September 25, 1985)
This provision was not really thought of as a
limitation on the power of taxation except in cases
where tax exemption were granted for a valuable
consideration.
STAGES OF TAXATION
15
(LAP-R)
1. LEVYING/ IMPOSITION (Tax Legislation)
It refers to the enactment of tax laws or statutes.
Generally, it cannot be delegated. It usually
includes the selection of coverage, object, nature,
extent and situs (CONES) in taxation, its purpose
and prescribing the rules in taxation in general.
 This is essentially legislative.
 This is referred to as the Impact of Taxation.
Courts have no power to interfere in the wisdom,
objective, motive or expediency in the passage of a
tax law, as this is purely legislative in character.
To do so would be tantamount to a violation of
both the letter and spirit of the organic laws by
which the Philippine Government was brought
into existence to invade a coordinate and
independent department of the Government and
to interfere with the legitimate powers and
functions of the Legislature. (Tolentino, et al. vs.
Secretary of Finance, 235 SCRA 630)
2. ASSESSMENT AND COLLECTION
(Tax Administration)
It is the act of administration and implementation
of tax law by the executive branch through its
administrative agencies. Nonetheless, the
delegation must pass the completeness and
sufficient standard test in order to prevent the
abuse of its exercise.
 This is essentially administrative.
 Also known as the Incidence of Taxation.
This is delegable by virtue of a valid statute. It is
the notice given to a taxpayer regarding his
liability and a demand to pay on time.
3. PAYMENT and /or Exercise of Remedies
This signifies an act of compliance by the
taxpayer. This is initially either through the
Executive or Legislative Department and
ultimately through the Judiciary.
This is the response of the people to the revenue
bill duly executed by the lawmaking body of the
government in the exercise of its power of
taxation.
This is also considered an Incidence of Taxation.
4. REFUND
Tax refunds are in the nature of tax exemptions.
They are regarded as in derogation of sovereign
authority and to be construed strictissimi juris
 16 |TAXATION LAW REVIEWER

against the person or entity claiming the Refers to the duties It is imposed on
exemption. The burden of proof is upon him who payable on goods different subjects
claims the exemption in his favor and he must be imported or exported and objects.
able to justify his claim by the clearest grant of from our country.
organic or statute law (Commissioner of Internal It also pertains to a It is broader in
Revenue vs. Court of Appeals, G.R. No. 104151, book of rates terms because it
March 10, 1995) containing names of includes all kinds of
merchandisers with impositions
corresponding duties including tariff or
DEFINITION, NATURE AND to be paid for. customs duties.
CHARACTERISTICS OF TAXES

TAX pertains to an enforced proportionate TAX TOLL

contribution imposed upon businesses, interests, It is a demand of It is a demand of
transactions, rights, acts, persons, properties and sovereignty. proprietorship.
privileges, within the territorial jurisdiction of the It is one’s support for It is a compensation
taxing authority, exercised by the legislature for a the government. for the use of
public purpose and generally payable in money. somebody else’s
property.
Essential Characteristics of Taxes It is imposed only by It may be imposed
the government based by government or by
a. Taxes are enforced contributions not on governmental private individuals
dependent on the will of the person taxed, not needs. and is determined by
a contract but a positive act of the the cost of property
government; or improvement
b. It is levied by the legislative body of the state; thereon.
c. It is generally payable in money;
d. It is imposed by the State on persons,
property or services within its jurisdiction;
e. It is proportionate in character-taxes must be As to: TAX LICENSE
based on the ability to pay in accordance with Purpose Revenue Regulation
the constitutional mandate to Congress to purposes purposes
evolve a progressive system of taxation; Amount No limit Has limit
f. It is levied for public purpose/s. (useful/non-
useful)

REQUISITES OF A VALID TAX Subject of Businesses, Required for

Imposition interests, the
a. It must not be violative of the constitutional, transactions, commencement
inherent and/or contractual limitations in the rights, acts, of a business or
power of taxation; persons, profession
b. It must be uniform and equitable, not unjust, properties
excessive, oppressive, confiscatory or and
discriminatory; privileges
c. It must be for a public purpose; (BI-
d. The taxing authority must have jurisdiction TRAPPP)
over the object of taxation;
e. It must be proportionate in character; Revocability Nature of Always
f. It is generally payable in money at regular permanence revocable
interval; Effect of It does not It makes the
g. It is levied by the Legislature that has Non- necessarily business illegal
jurisdiction over the object of taxation. compliance make the
act, business
or profession
illegal
TAX AS DISTINGUISHED FROM OTHER Scope Power to tax It does not
includes the include the
FORMS OF EXACTIONS
power to power to tax
license
TAXATION TARIFF

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 17

When Post-activity Pre-activity

Imposed imposition (no imposition
violation of (there is a
Exemption from Traditional exemptees
the Free violation of
taxes does not are not exempted.
Worship said clause)
include exemption Exemption is
Clause)
from special qualified.
Basis of Current data Data from
assessment
Computation preceding
year or
An imposition of a Added to the main tax
quarter’s
charge on all in case of
data. If new
property, real or improvement at the
business, it is
personal, in a instance of property
based on
prescribed area is a owners. It is
capitalization
tax and not an exceptional both as to
.
assessment although time and locality. A
Source of Taxing power Police power
its purpose is to charge imposed only
Power of the
make a local on the property
Government
improvement on a owners benefited is a
Limitation Subject to Not subject to
street or highway. special assessment
constitutional such
rather than a tax.
, inherent and limitations
contractual because the
limitations interest and
TAX DEBT
welfare of the
public must It is based on law It is based on contract
be It is not assignable It is assignable
safeguarded Non-payment covers Non-payment covers
Nature Self-assessing Not self- imprisonment except no imprisonment
assessing poll tax
Collecting National Local Generally payable in Payable in cash or
power Government Government money kind
Generally not subject Subject to set-off
to set-off
TAX SPECIAL Does not earn Draws interest when
ASSESSMENT interest except when stipulated or when in
Levied on businesses, Levied on land delinquent default
interests, Its prescriptive Prescriptive periods
transactions, rights, periods are those are provided under
acts, persons, provided under Civil Code or Rules of
properties and NIRC Court
privileges Imposed by public A private transaction
(BI-TRAPPP) authority
May be made a Cannot be made the
personal liability of personal liability of General Rule: Taxes are not debts because a tax
the person assessed the person assessed does not depend upon the consent of the taxpayer
because it is the land and there is no express or implied contract to pay
that answers for the taxes.
liability
Based on necessity Based wholly on Exceptions:
with no hope of direct benefits received A tax is considered a debt when:
or immediate benefit  It is secured by a bond.
to the taxpayer  Interest on delinquency is considered as
It is of general It is exceptional in interest on indebtedness.
application application for the  It is a collection being enforced by court
recovery of cost and/or action.
maintenance of  It is subject of a compromise agreement
improvement validly entered into between the government
Power to tax carries Does not carry the and the taxpayer.
with it the power to power to tax  When taxes are considered debts, the
levy special prescriptive periods to be used are those in
assessment the Civil Code and Rules of Court.
 18 |TAXATION LAW REVIEWER

AS TO GRADUATION
PROGRESSIVE REGRESSIVE
Tax rate increases as Tax rate decreases
KINDS OF TAXES the tax base as the tax base
increases (e.g. increases
AS TO OBJECT current Philippine
tax system)
PERSONAL PROPERTY
PROPORTIONATE MIXED
Is of fixed amount Imposed on Fixed rate regardless At certain point, it
imposed on property, real or of tax base is progressive, then
individuals, whether personal, in regressive
citizens or not, proportion to its
residing within a value (e.g. real Proportionate is presently referred to as
specified territory, property taxes) community development tax.
without regard to
their property or It is payable in the city or municipality where that
occupation (e.g. poll taxpayer is domiciled.
taxes, community
tax)
PRIVILEGE
Imposed for the exercise of a right or privilege
or of doing business

AS TO BURDEN OR INCIDENCE
DIRECT INDIRECT
Tax for which a Tax primarily paid
taxpayer is directly by persons who can
liable on the shift the burden
transaction or business upon someone else
it engages in (e.g. estate (e.g. VAT)
and donor’s gift tax)

AS TO TAX RATE
SPECIFIC AD VALOREM
Imposed and based on Based on selling
weight or volume price or other
capacity or any other specified value of
physical unit of goods (e.g. real
measurement property tax)
(e.g. excise tax on
alcohol, tobacco
products)

AS TO PURPOSE
GENERAL SPECIFIC
Imposed solely to raise Imposed and
revenue for the collected to achieve a
government (e.g. particular legitimate
internal revenue taxes object of government
by the government) (e.g. additional 1%
tax levied under R.A.
No. 5447)

AS TO SCOPE OR AUTHORITY TO IMPOSE

NATIONAL LOCAL
Imposed by the Levied and collected
national by the local
government government.

- real property tax

-internal revenue - municipal tax
taxes

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012

 19

taxpayer other than a producing goods or

mere return of capital. services.
Flow of wealth Fund or property
Service of wealth Wealth
Fruit of the tree Tree

 A mere increase in the value of property is not

income but merely unrealized increase in
capital. The increase in the value of property

NATIONAL INTERNAL REVENUE CODE OF 1997

(NIRC)
as amended

NATIONAL INTERNAL REVENUE TAXES is also known as appraisal surplus or

(Sec. 21) revaluation increment.
1. Income tax
2. Estate and Donor’s tax
3. Value-Added tax Salient Features of the Present Income Tax
4. Other percentage tax System
5. Excise tax
6. Documentary stamp tax Individual Corporate
7. Such other taxes as are or hereafter may be
Income Income
imposed and collected by the BIR.
Taxation Taxation
Tax Schedular Global
Treatment
INCOME TAXATION
Net RC Domestic (DC)
BASIC CONCEPTS Income NRC Resident
Taxation RA Foreign (RFC)
Income Tax is a tax on all yearly profits arising NRA-ETB
from property, possessions, trade or business, or Gross Non-resident
as a tax on a person’s income, emoluments, profits Income NRA-NETB Foreign Corp.
and the like. (61 CJS 1559) It is tax on income, Taxation (NRFC)
whether gross or net. (27 Am. Jur. 208) Income Residence- Residence –RFC
Tax Situs RA,RC Place-NRFC
Income tax is generally classified as an excise tax. Place- NRA, Nationality- DC
It is not levied upon persons, property, funds or NRC
profits but upon the right of a person to receive Citizenship -
income or profits. RC
Personal Individual
Income may be defined as the gain derived from exemptions taxpayers
capital, from labor or from both combined, Exception: N-A
provided it is understood to include profit gained NRA-NETB
through a sale or conversion of capital assets.
(Doyle vs. Mitchell, 247 US 179) Common Features
Pay as you Upon filing Upon filing of
It is any wealth which flows into the taxpayer file system of their ITR their quarterly
other than a mere return of capital (Fisher vs. corporate ITRs
Trinidad) and final
adjustment
Capital – resource of person, which can be used in corporate
producing goods and services. returns
Creditable Withholding agent (source) -
Income Capital Withholding withholds the tax and remits
All wealth, which Fund or property Tax System the same to the BIR.
flows into the which can be used in Tax withheld- creditable
against income tax due.
20 |TAXATION LAW REVIEWER
Final Withholding agent (source) -
withholding withholds the tax and remits
tax system the same to the BIR.
Tax withheld- final settlement
of the tax liability on the
income covered.
INCOME TAX SYSTEMS
a. GLOBAL TAX SYSTEM. One where the
taxpayer is required to lump all the items of
income earned during a taxable period and
pay under a single set of income tax rules on
these different types of income.
b. SCHEDULAR TAX SYSTEM. Provides for a
different tax treatment of different types of
income so that a separate tax return is
required to be filed for each type of income
and the tax is computed on a per return or
per schedule basis.
c. SEMI-SCHEDULAR OR SEMI-GLOBAL
TAX SYSTEM. (i.e. gross income less
allowable deductions and exemptions) One
which is subjected to one graduated tax
rates, in case of an individual, or normal
corporate income tax rate, if a corporation.
Schedular System vs. Global System
A. Schedular System of Taxation
 System adopted in imposing taxes on the
income of individual TPs
 Employed where income tax treatment varies
and made to depend on the kind or category
of taxable income of the TP.
 Provides for different tax rules or treatments.
 By making it depend on the kind or category
of taxable income, it means that it classifies
or categorizes income.
Important Characteristics or Features
1. Income is classified or categorized. (Sec. 32A)
2. It provides for different tax rules or
treatment. (Secs. 24 and 25)
3. Imposes different tax rates known as the
progressive rates of income tax. (Secs. 24 and
25)
B. Global System of Taxation
 System adopted in imposing tax of corporate
TP
 Uniform tax rules or treatments
 Does not classify or categorize income.
Secs. 27 and 28 apply.
FEATURES OF THE PHILIPPINE INCOME
TAX LAW
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
a. Direct Tax – the tax burden as well as the
tax liability lie in the same person.
b. Progressive Tax – the tax rate increases as
the tax base increases
c. Comprehensive – adopts the citizenship
principle, the residence principle, and the
source principle
d. Semi-schedular or Semi-global tax MI-
SCHEDULAR Tax System – taxable income
(i.e. gross income less allowable deductions
and exemptions) is subjected to one
graduated tax rates, in case of an individual,
or normal corporate income tax rate, if a
corporation.
CRITERIA IN IMPOSING PHILIPPINE
INCOME TAX (Sec.23, NIRC)
a. CITIZENSHIP PRINCIPLE. A citizen of the
Philippines is subject to income tax on all
income derived from sources within and
without the Philippines, if he is a resident
therein; on income derived from sources
within, if he is a non-resident citizen
b. RESIDENCE PRINCIPLE. A resident alien
is taxable only on income derived from
sources within the Philippines and exempt
on income derived from sources without the
Philippines.
c. SOURCE PRINCIPLE. The income of a non-
resident alien is taxable because he derives
income from sources within the Philippines.
TYPES OF PHILIPPINE INCOME
a. Compensation Income – income derived from
services rendered under an employer-
employee relationship.
b. Professional Income – income derived from
the exercise of a profession as a means of
living.
c. Business Income – any profit or gains
derived from rendering services, producing,
manufacturing, or selling products, farming,
and long term construction contracts.
d. Passive Income – any gain or profit which
the taxpayer merely waits for it to come in
such as royalties, dividends, winnings and
prizes, or interest income.
e. Capital Gain – gain from dealings in capital
assets.
SITUS OF INCOME TAX (Sec. 23, NIRC)
Quick Glance
Taxpayer Source of Income
Resident Citizen Within & Without
Non-resident Within
citizen/OCW
Resident alien Within
Non-resident alien Within
Domestic Corporation Within & Without
 21

Foreign Corporation Within 3. The income, gain or profit is received or

(Resident/non-resident) realized during the taxable year; and
4. There is no law which excludes it from
SEC. 23. General Principles of Income Taxation in taxation.
the Philippines. - Except when otherwise provided
in this Code: DOCTRINES ON REALIZATION OF INCOME
a. A citizen of the Philippines residing therein is
taxable on all income derived from sources 1. Severance Test – income is not deemed
within and without the Philippines; realized until the fruit has been plucked from
b. A nonresident citizen is taxable only on the tree. Income is recognized when there is
income derived from sources within the separation of something which is of
Philippines;
exchangeable value (Eisner vs. Macomber, 252
c. An individual citizen of the Philippines who is US 189).
working and deriving income from abroad as
an overseas contract worker is taxable only on 2. Claim of Right Doctrine – a taxable gain is
income derived from sources within the conditioned upon the presence of a claim of
Philippines: Provided, That a seaman who is right to the alleged gain and the absence of a
a citizen of the Philippines and who receives definite unconditional obligation to return or
compensation for services rendered abroad as repay that which would otherwise constitute
a member of the complement of a vessel a gain.
engaged exclusively in international trade
shall be treated as an overseas contract  Illegally acquired income constitutes realized
worker; gain. (Rutkin vs. US)
d. An alien individual, whether a resident or not
of the Philippines, is taxable only on income 3. Control Test/Doctrine of Ownership,
derived from sources within the Philippines; Command or Control of Income) – power to
e. A domestic corporation is taxable on all procure the payment of income and enjoy the
income derived from sources within and benefit thereof. (ex. Prepaid rents)
without the Philippines; and
f. A foreign corporation, whether engaged or not  There is realization of income if the donor
in trade or business in the Philippines, is during a taxable year, detaches the interest
taxable only on income derived from sources coupon from his bond, donates it to somebody
within the Philippines. who receives payment upon maturity.
(Helvering vs. Horst)
Source Rules in Determining Income from Within
and Without 4. Doctrine of Actual Receipt of Income – the
gain must be realized or received.
Type
Interest Residence of the 5. Doctrine of Constructive Receipt of Income.
debtor Income which is credited to the account of or
Income of Place of sale set apart for a taxpayer and which may be
merchandising drawn upon by him at any time is subject to
business tax for the year during which so credited or
Services or Place of performance set apart, although not then actually reduced
compensation income of service to possession. The income must be credited to
Rentals Location of property, the taxpayer without any substantial
real or personal limitation or restriction as to the time or
Royalties Place of use of manner of payment or condition upon which
intangibles payment is to be made.
Gain on sale of real Place of sale
property 6. Economic Benefit Test – any economic benefit
Gain on sale of Place of sale to the employee that increases his net worth
personal property is taxable.
Gain on sale of shares Within Phils.
TAX ACCOUNTING PERIODS
of stock of domestic irrespective of place
1. Calendar period – starts January 1 and ends
corporation of sale
on December 31.
2. Fiscal period – starts on the 1st day of any
REQUISITES FOR TAXABILITY OF INCOME month other than January and ends 12
months thereafter.
1. There must be a closed and completed 3. Short period – income for a period less than
transaction; 12 months is required to be reported when the
2. A gain or profit is derived therefrom;
 22 |TAXATION LAW REVIEWER
taxpayer dies or when the taxpayer is under
jeopardy assessment.
 Taxable income shall be computed on the
basis of calendar year if:
1. annual accounting period is other than
fiscal year; or
2. TP has no annual accounting period; or
3. he does not keep books; or
4. TP is an individual.
METHODS OF REPORTING INCOME AND
EXPENSES
1. Cash method – generally reports income upon
cash collection and reports expenses upon
payment. If earned from rendering of services,
income is to be reported in the year when
collected whether earned or unearned. (Sec.
108, NIRC)
2. Accrual Method – generally reports income
when earned and reports expense when
incurred. If earned from sale of goods, income
is to be reported in the year of sale,
irrespective of collection. (Sec. 106, NIRC)
3. Installment Method. Method considered
appropriate when collections of the proceeds
of sales and incomes extend over relatively
long periods of time and there is strong
possibility that full collection will not be
made. Under this method, the TP may report
income over the several taxable years in
which collections are made based on the terms
of payment.
Function: to permit the spreading of the
income tax over the period during which
payments of the sale price are received.
The income to be reported for the year:
Total collections
during the year
X Gross Profit Rate
When Installment Method Allowed
1. Installment Sale of Personal Property
(Sec. 49, NIRC)
a. Personal property is regularly sold on an
installment basis by a dealer;
b. Casual sale of personal property on
installment basis where the selling price
exceeds P1,000 and the initial payments
do not exceed 25% of the selling price.
 As a rule, in casual sale of personal
property, if the initial payment exceeds
25% of the selling price, the transaction
is considered cash sales. (Sec 49 B, NIRC)
2. Installment Sale of Real Property
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
a. Sale of realty (inventory) where the
initial payments do not exceed 25% of the
selling price.
 This sale is subject to CWT and normal
tax for corporate taxpayer (RA 9337) of
5% to 32% for individual taxpayer. (Sec.
24 A, NIRC)
b. Sale by individuals or real property
considered as capital asset, if initial
payments do not exceed 25% of the selling
price.(Sec. 49 C, NIRC)
 This sale is subject to a CGT of 6% based
on the selling price or zonal value
whichever is higher.
4. Deferred Payments
They include:
a. Agreements of purchase and sale which
contemplate that a conveyance is not to be
made at the outset, but only after all or a
substantial portion of the selling price has
been paid; and
b. Sales in which there is an immediate
transfer of title, the vendor being
protected by a mortgage or other lien as to
deferred payments.
Such sales under (a) or (b) fall into two classes
when considered with respect to the terms of
sale, as follows:
1. Sale of property on the installment plan,
that is, sales in which the cash or property,
other than evidence of indebtedness of the
purchaser, received in payment during the
taxable year in which the sale is made do
not exceed 25% of the selling price; or
2. Deferred-payment sales are sales which the
payments received in cash or property other
than evidences of indebtedness of the
purchaser during the taxable year in which
the sale is made exceed 25% of the selling
price.
5. Percentage of Completion Method
This is applicable in case of a building,
installation or construction contract covering a
period in excess of one year, whereby gross
income derived from such contract may be
reported upon the basis of percentage of
completion.
In determining the percentage of completion of
a contract, one of the following methods is
generally used:
a. The cost incurred under the contract as of
the end of the tax year are compared with
the estimated total to be performed; or
b. The work performed on the contract as of
the end of the tax year is compared with
the estimated work to be performed.
 23

o Corporations falling under MCIT (2% of gross

income) Under net income taxation, taxable
income is the net income. This applies to
taxpayers other than the above.

o For taxpayers (individuals or corporations)

earning business income, taxable income is:
GROSS INCOME
Gross sales
Gross income means the pertinent items of income Less: Cost of sales
referred to in Section 32(A) of the Tax Code. It Equals : Gross Income
pertains to ALL such gains, profits or income Less: Allowable deductions
derived from any source. Equals: Taxable income

Includes all items in Sec. 32(A) of the tax code but o For taxpayers earning pure compensation income
NOT LIMITED thereto and excludes all items in (individuals), taxable income is:
Sec. 32(B) - exclusions.
Gross compensation
For purposes of computing the income tax on Less: BPE/APE
domestic corporations, however, gross income Premium payment on
means gross sales less sales returns, discounts, health/hospitalization insurance
allowances and cost of goods sold (all business (max of 2,400/yr)
expenses directly incurred). Equals: Taxable income

Net income means gross income less deductions o For taxpayers earning both compensation income
and exemptions. and business income (individuals), taxable income
is:
Taxable income
 Refers to the tax base of income tax Gross Income
(income upon which the tax rate is Less: Allowable deductions
applied to obtain the income tax payable). Equals: Net Income
Less: BPE/APE
 Under Sec. 31 of NIRC, taxable income Equals: (Net) Taxable income
may either refer to gross income (if there
are no deductions or exemptions) or net Formula for computation of business income tax:
income.
Gross Sales (Revenue)
Less: Sales returns, discount and allowances
 Under gross income taxation, taxable Cost of Sales
income is the gross income (tax base is Equals: Gross Income
the gross income). This applies only to:
Less: Allowable deductions [sec. 34 A-J, Sec. 37 for
o NRA-NETB where gross income includes insurance companies]
dividends, interest and royalties, technical - if itemized deduction is opted
assistance and service fees, rental and leasing or
Optional Standard Deduction if not
income and capital gains. Gross income is subject
exceeding 40% -RA 9504 (sec. 34 L) - if OSD is
to final withholding tax of 25%. elected
Equals: Net Income
o NRFC where gross income includes dividends,
interest and royalties, technical assistance and Less: Personal and additional exemptions - Note:
service fees which are all subject to final only for individuals.
withholding tax of 30% (generally). Equals: Net Taxable income

o Corporations electing to be taxed at 15% of its Multiplied by Tax Rate (30% effective Jan. 1, 2009
gross income rather than 30% (a corporation – RA 9337)
Equals: Income Tax Due
whose cost of sales to gross sales ratio is not more
Less: Income tax withheld and/or Tax Credits
than 55%, may opt to be taxed at 15% of its gross Equals: Income tax payable
income subject to certain conditions).
 24 |TAXATION LAW REVIEWER

4. Taxable Net Income

x Income Tax Rates
= Income Tax due;

5. Income Tax
– Creditable Withholding and/or Tax Credit
= NET TAXABLE INCOME

GROSS INCOME vs. NET INCOME vs.

TAXABLE INCOME
Items of Gross Income (Sec 32A)
Gross Net Income Taxable 1. Compensation for services
Income Income 2. Gross income from the conduct of trade or
All items of The pertinent Gross business or practice of profession
income less items of gross compensation 3. Gains derived from dealings in property
exclusions. income less personal 4. Interests
specified in and additional 5. Rents
the Tax Code, exemptions 6. Royalties
less (individual 7. Dividends
deductions taxpayers). 8. Annuities
and/or 9. Prizes and winnings
personal and 10. Pensions
additional 11. Partner’s distributive share from the net
exemptions, income of the GPP
if any, 12. Income from whatever source derived
authorized
for such types Exclusions from Gross Income
of income by 1. Proceeds of life insurance paid to the
the Tax Code beneficiary upon death of the insured
or other 2. Amount received by the insured as a return
special laws of premium
(Sec. 31, 3. Gifts, bequests and devices
NIRC). 4. Compensation for injuries or sickness
5. Income exempt under treaty
Gross Income Net Income 6. Retirement benefits, pensions, gratuities
7. Miscellaneous items:
Taxation Taxation
a. Income derived by foreign government
No deductions allowed Deductions are
b. Income derived by the government or its
allowed
political subdivisions
No exemptions can be Exemptions are c. Prizes and awards – in recognition of
granted granted religious, charitable, scientific,
Tax Base: Gross Tax base: Net Income educational,
Income Sec. 31 artistic, literary or civic achievement
Applies to: Applies to: subject
NRA-NETB and RC; NRC; RA; NRA- to two conditions
NRFC. ETB; DC; RFC. d. Prizes and awards in sports competition
e. 13th month pay and other benefits
f. GSIS, SSS, Medicare, Pag-ibig
FORMULA: Income tax is imposed on the NET contributions and Union dues
taxable income computed as follows: (sec. 31-35) g. Gains from the sale of bonds, debentures
or other certificate of indebtedness with
1. ALL income maturity of more than 5 years
– Exclusion h. Gains from redemption of shares in
= GROSS INCOME mutual
fund
2. Gross Income
– Allowable Deductions
= Net Income; (taxable net income in the case of
ITEMS OF GROSS INCOME
corporation)

3. Net Income Item 1.COMPENSATION INCOME.

– Less Personal and Additional Exemptions All remuneration for services performed by an
= Taxable Net Income; employee for his employer under an employer-

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012


employee relationship unless specifically excluded
under the Tax Code.
It includes salaries, wages, emoluments
honoraria, bonuses, allowances, (transpo.,
representation, entertainment and the like);
fees including director’s fees, if the director is,
at the same time, an employee of the
corporation; taxable bonuses and fringe
benefits except those subject to FBT; taxable
pensions and retirement pay; and other
income of similar nature including
compensation paid in kind.
Basis/Test: The designation/name of the
remuneration upon which it is paid and the
manner of payment is immaterial. What is
important is that it is derived from employer-
employee relationship.
Requisites for Taxability
a. Personal services actually rendered.
b. Payment is for such services rendered.
c. Payment is reasonable.
Tax Base of Compensation Income
Modified gross income
Formula:
Aggregate compensation income xx
Less: Health/hosp. premium, if any xx
Adjusted gross income xx
Less: Personal Exemptions xx
Taxable compensation income xx
Personal exemptions is comprised of Basic PE of
P50,000 and P25,000 for each qualified dependent
child (not exceeding 4).
Health/hospitalization premium is allowed to the
extent of P2,400 if aggregate family income does
not exceed P250,000. For married individuals, the
spouse who claims additional personal exemption
shall claim the premium deduction.
CLASSIFICATION OF GROSS
COMPENSATION INCOME
Revenue Regulations No. 2-98, Section 2.78.1A,
and Section 8 of the NIRC classify gross
compensation income as follows:
1. Basic Salary or Wage
Salary refers to earnings received periodically for
a regular work other than manual labor, such as
a monthly salary of an employee
Wages refers to earnings received usually
according to specified intervals of work, as by the
hour, day, or week.
2. Honoraria are payments given in recognition for
services performed for which established practice
25
discourages charging a fixed fee. The honorarium
of a guest lecturer is an example.
3. Fixed or Variable Allowances. In general, fixed
or variable transportation, representation and
other allowances that are received by a public
officer, or employee or officer or employee of
private entity, in addition to the regular
compensation fixed for his position or office, is
compensation subject to withholding tax. (Rev.
Reg. no. 2-98, Sec. 2.78.1; Rev. Reg. 6-82, Sec 2c)
Any amount paid specifically, either as advances
or reimbursements for traveling, representation
and other bona fide ordinary and necessary
expenses incurred or reasonably expected to be
incurred by the employee in the performance of his
duties are not compensation subject withholding
tax, if the following conditions are satisfied:
a. It is for ordinary and necessary traveling
and representation or entertainment
expenses paid or incurred by the
employee in the pursuit of the employer’s
trade, business or profession; and
b. The employee is required to
account/liquidate for the foregoing
expenses.
Examples:
a. Transportation
b. Representation
c. Other allowances, such as Cost of Living
allowances (COLA)
4. Commission is usually a percentage of total
sales or on certain quota of sales volume attained
as part of incentive, such as sales commission.
5. Fees are received by an employee for the
services rendered to the employer including
director’s fee of the company, fees paid to the
public officials, such as clerks of court or sheriffs
for services rendered in the performance of their
official duty over and above their regular salaries.
6. Tips and Gratuities is being paid directly to an
employee (by a customer of the employer) which
are not accounted for by the employee to the
employer. They are considered taxable income but
not subject to withholding tax.
7. Hazard or Emergency Pay is an additional
payment received due to workers’ exposure to
danger or harm while working. This is normally
added to the basic salary together with the
overtime pay and night differential pay to arrive
at gross salary.
8. Retirement Pay refers to a lump sum payment
received by an employee who has served a
company for a considerable period of time and has
decided to withdraw from work into privacy.
 26 |TAXATION LAW REVIEWER

In general, retirement pay is taxable except in the benefits received by heir upon death of
following instances: employee is not taxable.
a. SSS or GSIS retirement pays;
b. Retirement pay due to old age provided 12. Thirteenth Month Pay and Other Benefits. As
that the following requisites are met: a general rule, thirteenth (13th) month pay and
(1) The retirement program is approved other benefits are not taxable if the total amount
by the BIR Commissioner; received is P30,000.00 or less.(NIRC, Sec. 32(7)(e)
(2) It must be a reasonable benefit plan.
Its implementation must be fair and 13. Overtime Pay refers to premium payment
equitable for the benefit of all received for working beyond regular hours of work
employees; which is included in the computation of gross
(3) The retiree should have been salary of employee.
employed for ten (10) years in the
said company; 14. Profit Sharing is the proportionate share in the
(4) The retiree should have been fifty profits of the business received by the employee in
(50) years old at the time of addition to his wages.
retirement; and
(5) It should have been availed of for the 15. Awards for Special Services refers to the
first time. amount received as an award for special services
of employee, or suggestions to employer resulting
9. Separation Pay. It is taxable if voluntary in the prevention of theft or robbery.
availed of. It shall not be taxable if involuntary.
Involuntary separation are the following: 16. Beneficial Payments such as where an
a. Death; employer pays the income tax owed by an
b. Sickness; employee are additional compensation income.
c. Disability;
d. Reorganization/merger of company; and 17. Fringe Benefits not subject to FBT
e. Company at the brink of bankruptcy.
Forms and Measure of Compensation Income
Any payment made by an employer to an
employee on account of dismissal constitutes Forms of Measure of Income
compensation, regardless of whether the Compensation
employer is legally bound by contract, statute, or Cash Amount of money
otherwise, to make such payment. (Rev. Reg. no. received
2-98, sec. 2.78(B)(1)(b). Property or in kind Fair market value of
the property received
10. Pension is a stated allowance paid regularly to (Doctrine of Cash
a person on his retirement or to his dependents on Equivalent)
his death, in consideration of past services, Promissory notes or Not discounted –
meritorious work, age, loss or injury. other evidence of Face Value
indebtedness If the note can be
It is taxable unless the law states otherwise or discounted, the FMV
unless the BIR approves the pension plan of a of note upon receipt
private company. is the fair discounted
value.
11. Vacation and Sick Leave. The following rules
Price is stipulated FMV of the
should be observed in determining whether money
compensation in the
received for vacation and sick leave is taxable or
absence of contrary
not:
evidence.
Condonation of debt* Amount of debt
a. If paid or availed of as salary of an
cancelled
employee who is on vacation or on sick
Premiums paid by Amount of premium
leave notwithstanding his absence from
employer (employee’s paid.
work, it constitutes taxable compensation
family, executor,
income.
administrator or
b. Monetized value of unutilized vacation
estate is the
leave credits of ten (10) days or less which
beneficiary)**
were paid to private employees during the
year and the monetized value of leave
credits paid to government officials and
employees are not subject to income tax *Cancellation, Condonation or Forgiveness of
and to the withholding tax. Indebtedness
c. Terminal leave or money value of
accumulated vacation and sick leave

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012

 27

The amount condoned may be considered as On the part of the stockholder, such amount of
compensation income or a donation or a capital debt cancelled, is a taxable income subject to 10%
transaction, depending on the circumstances of Final Tax if the corporation is a DC.
the case.

Tax Effects/Implications/Incidences **Life Insurance Premium

Beneficiary Effects
1. Considered as Compensation Income to the ER: The ER can deduct
EE deductible to the ER The heirs, family, the amount of the
executor or premiums paid a s a
Requisites: administrator of the form of business
a. the cancellation or forgiveness must be estate expense. (Sec 3 A (i)
in consideration or based on account of
services rendered; EE:
If EE is a managerial or
b. The creditor must be the ER, the debtor supervisory EE- subject
must be the EE; to Final Tax (FBT)

c. The ER condoned the debt of the EE in If EE is rank-and-file-

consideration of the services rendered. considered
compensation income
Effects: and is subject to
1. To the ER-creditor, that may be progressive tax rate of
claimed as a deductible expense 5-32%
because this is really a form of Employer ER- cannot claim it as
compensation for services rendered. deductions or expenses
(Sec. 3 A (1) because the insurance
proceeds are but a mere
2. To the EE-debtor, it is compensation return of capital. (Sec.
income taxable (Sec. 32A (1) “in 36 A (4)
whatever form paid”.
EE- Not taxable- no
2. As a Taxable Donation benefit received by the
EE or his family.
If no consideration was given, the obligation was
simply condoned, renounced by the creditor-ER, it Tax Exempt Compensation Income
amounts to a taxable donation. a. De minimis benefits; and
b. Benefits provided for the convenience of the
Effects: employer.
1. If there’s donation, the creditor
becomes the donor. The debtor becomes DE MINIMIS
the donee or the recipient of the The term “de minimis” benefits which are
liberality. exempted from the fringe benefits tax shall, in
general, be limited to facilities or privileges
2. The creditor-donor is subject to donor’s furnished or offered by an employer to his
tax. employees that are of relatively small in value.
These are offered or furnished by the employer
3. It is not subject to income tax. merely as means of promoting the health,
goodwill, contentment or efficiency of his
3. As a Capital Transaction employees.

This may take the form of indirect distribution of Rules on ‘De Minimis’ and ‘Other Benefits’
dividends by a corporation. The creditor must be a The following rules shall be observed in
corporation and the debtor must be a stockholder. determining the taxability of the ‘de minimes’ and
(Sec. 43, Corporation Code) the P30,000 ‘other benefits’ ceiling under Section
 28 |TAXATION LAW REVIEWER
32(b)(7)(e) of the Tax Code: (Sec 1, Rev Regs. No
10-2008)
1. the amount of the ‘de minimis’ benefits
conforming to the ceiling herein prescribed
shall not be considered in determining the
P30,000 ceiling of ‘other benefits’ excluded
from gross income under 32(b)(7)(e) of the
Tax Code.
2. The excess of the ‘de minimis’ benefits over
their respective ceiling prescribed by these
regulations shall be considered as part of
the ‘other benefits’ and the employee
receiving it shall be subject to tax only on
the excess over the P30,000 ceiling.
3. The MWEs receiving ‘other benefits’
exceeding the P30,000 limit shall be taxable
on the excess benefits, as well as on his
salaries, wages and allowances, just like an
employee receiving compensation income
beyond SMW.
The BIR sets a limit on the value of tax-exempt de
minimis benefits. Under RR 8-00, as amended by
RR 10-00, the BIR considers the following as de
minimis benefits:
 10 days monetized unused vacation leave
credits;
 medical cash allowance to dependents of
employees not exceeding P750 per
semester or P125 per month;
 rice subsidy of P1,000.00 or one-sack of
rice per month;
 uniforms and clothing allowance not
exceeding P3,000.00 per year;
 medical benefits not exceeding
P10,000.00;
 laundry allowance of P300 per month;
 employee achievement awards in the
form of tangible personal property other
than cash or gift certificate, with an
annual monetary value not exceeding
P10,000 received by the employee under
an established written plan;
 flowers, fruits, books or similar items
given to employees under special
circumstances, e.g. on account of illness,
marriage, birth of a baby, etc.; and
 daily meal allowance for overtime work
not exceeding 25% of the basic minimum
wage.
Convenience of the Employer Rule
It grants exemption to benefits which are given for
the exclusive benefit or convenience of the
employer. When a fringe benefit is given to an
employee solely for the convenience of the
employer, the fringe benefit is exempt from the
fringe benefit tax. The employee will not recognize
the income from the benefit, whether the
employee is a managerial or supervisory
employee, or a rank and file employee.
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
Items not included as Compensation Income:
a. For agricultural labor paid entirely in
products of the farm where the labor is
performed; or
b. For domestic service in a private home; or
c. For casual labor not in the course of the
employer’s trade or business; or
d. For services by a citizen or resident of the
Philippines for a foreign government or an
international organization (Sec. 78 [A],
NIRC).
Tax Implications when Payment is Made for
Services Rendered
1. As far as the employer is concerned, it may
be claimed as deductible expense.
2. It is an income to the employee.
Requisites for Deductibility
1. It is a payment for services rendered;
2. It must arise from EE-ER relationship;
3. It must be reasonable/represents the FV
of the services rendered.
Item 2. BUSINESS INCOME/INCOME FROM
PRACTICE OF PROFESSION
Business - any commercial activity engaged in as
a means of livelihood or profit of an individual or
group of individuals. Examples: trading,
merchandising, manufacturing and other similar
activities.
Profession - primarily any endeavor or work
requiring specialized training in the field of
learning, art, or science engaged in as a means of
livelihood or profit of an individual or groups of
individuals. In general, a practice or profession is
a service business.
Income Covered
1. Income derived by Self-Employed from trade
or business.
2. Income derived by professionals from the
practice of profession.
Formula of Gross Income
The term gross income shall mean gross sales less
sales returns, discounts and allowances, and cost
of goods sold (Sec. 27A, NIRC) plus any income
from investment and other incidental or outside
operations or sources. (Sec. 43)
Service Business: Gross income is based on gross
receipts less returns, allowances, discounts and
cost of services. (Sec. 43)
In determining gross income, deductions should
not be made for depreciation, depletion, selling
expenses or losses or for items not ordinarily used
in computing the cost of goods sold.
 29

Item 3. GAINS FROM DEALINGS IN  Amount realized from sale or other

PROPERTY (Sections 39, 40)
This refers to the income derived from the sale,
and/or exchange of assets, which results in gain
because of the excess of the amount or value
received by the taxpayer over the determined
value of the property he has disposed of. The
general rule is that the entire amount of the gain
or loss arising therefrom is a taxable gain or
deductible loss.
disposition of property = sum of money
received + fair market value of the
property (other than money) received.
In computing the gain or loss from the sale or
other disposition of property, the basis shall be as
follows:
1. Property acquired by purchase – its cost, i.e.,
the purchase price plus expenses of acquisition.
2. Property which should be included in the
inventory – its latest inventory value.

The term “dealings in property” refers to the 3. Property acquired by devise, bequest or
disposal through sale or exchange of inheritance – its fair market price or value as of
a. ordinary assets, or the date of acquisition.
b. capital assets. 4. Property acquired by gift or donation – the same
as if it would be in the hands of the donor or at last
If the asset involved is classified as ordinary, the preceding owner by whom it was not acquired by
entire amount of the gain from the transaction gift, EXCEPT that if such basis is greater than the
shall be included in the computation of gross FMV of the property at the time of the gift then,
income [Sec 32(A)], and the entire amount of the for the purpose of determining loss, the basis shall
loss shall be deductible from gross income. [Sec be such FMV.
34(D)]. Allowable Deductions from Gross Income - 5. Property (other than capital asset) acquired for
Losses) less than an adequate consideration in money’s
worth –
• If the property sold is a capital asset (except a) the amount paid by the transferee for the
shares of stock not listed nor traded in a local stock property; or
exchange and real property subject to capital b) the transferor’s adjusted basis at the time of the
gains tax), the rules on capital gains and losses transfer whichever is greater
apply in the determination of the amount to be
included in gross income. 6. Property acquired in a transaction where gain
or loss not recognized
The kind of property involved determines the tax – The basis shall be the same as it would have
implication and income tax treatment, as follows: been in the hands of the transferor increased by
the amount of gain recognized by the transferor on
ORDINARY CAPITAL the transfer.
ASSET ASSET*
(See more discussion in separate section, Capital
Gain from Ordinary Capital Gains Tax)
sale or Gain Gain
exchange Item 4. INTEREST INCOME
Loss from Ordinary Loss Capital
sale or Loss Interest income is the amount of compensation
exchange paid for the use of money, goods, or credit or
Excess of Goes into Net forbearance from such use. Unless exempted by
Gains over computation Capital law, interest income received by the TP, whether
the Losses of Gain or not usurious, is subject to income tax.
Ordinary Net
Income
Interest Income Tax Rate Payee
From any currency 20% DC,
*(except shares of stock not listed nor traded in a local deposit, yield or any RFC,
stock exchange and real property subject to capital gains other monetary benefit RC,
tax)
from deposit substitutes NRC,
and from trust funds and RA,
Computation of Gain or Loss [Sec.40(A)]:
similar arrangements NRA-
derived from Philippine ETB
Amount realized from sale or other
sources.
disposition of property xx
Less: basis or adjusted basis xx From long term deposit 5%- 4- less RC,
GAIN (LOSS) xx or investment in the than 5 NRC,
form of savings, common years; RA,
or individual trust funds,
 30 |TAXATION LAW REVIEWER

substitutes, investment 12%-3 to NRA-  If security deposit is to ensure

management accounts less than ETB contract compliance, it is not income
and other investments 4 years; to the lessor until the lessee violates
evidenced by certificates 20%- less any provision of the contract.
in such form prescribed than 3
by BSP years  Must be reported as part of gross
DC, income.
From FCDU deposits 7.5% RFC,
RC, Rental income on the lease of personal property
NRC, located in the Philippines and paid to non-resident
RA taxpayer shall be taxed as follows:

NON- NON-
From foreign currency 10% RC,
RESIDENT RESIDENT
loans granted by FCDUs RA, CORPORATION ALIEN
to residents other than DC,  Vessel 4.5% 25%
OBUs banks or other RFC  Aircraft,
depositary under the machineries
expanded system and other
From foreign currency 10% RC, equipment 7.5% 25%
loans granted by the RA,  Other
OBUs to residents other DC, assets 32.0% 25%
than OBUs or local RFC
commercial banks Items considered likewise as rental income:
including branches of 1. Obligations of lessor to 3rd parties assumed by
foreign banks that may the lessee:
be authorized by BSP to a. real estate taxes on leased premises;
transact business with b. insurance premiums paid by lessee on
OBUs property;
On foreign loans 20% NRFC c. dividends paid by lessee to stockholders
contracted on or after of lessor-corporation;
August 1, 1986; d. interest paid by lessee to holder of bonds
Any interest income from EXEMPT NRC, issued by lessor-corporation.
transactions with NRA,
depositary banks under NRFC 2. Value permanent improvements made by
FCDs lessee that will become property of the lessor
upon the expiration of the lease.

Item 5. RENTAL INCOME Method of Reporting the Value of Permanent

It is amount or compensation paid for the use or
enjoyment of a thing or a right and implies a fixed
sum or property amounting to a fixed sum paid at
a stated time for the use of the property.
Includes all amount or property received
from lease contract whether used in
business or not.
 Prepaid or advance rental is
TAXABLE INCOME to the lessor in
the year received, if so received
under a claim of right and without
restriction as to its use and
regardless of method of accounting
employed.
 Security deposit applied to the
rental of the terminal month or
period of contract must be
recognized as income at the time it
is applied.
Improvements Introduced by the Lessee:
a. Outright Method – recognized as income
to the lessor at the time when such
buildings/improvements are completed at
FMV; or
b. Spread Out Method – the lessor spread
over the life (remaining period) of the
lessee, the estimated depreciated value of
such buildings or improvements, at the
termination of the lease and report as
income for each year of the lease, an
aliquot part thereof.
Formula: Annual income from leasehold
improvement =
Estimated book value of the leasehold
improvement at the end of the lease
contract
Remaining term of the lease in years
Item 6. ROYALTIES

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 31

It is the payment for the use and exhaustion of
property such as earnings from copyrights,
patents, trademarks, formulas and natural
resources under lease.
If the recipient of the royalty paid by DC is either
a NRA-NETB or NRFC, a lower tax rate may be
allowed under an existing rate.
It is subject to final tax. Royalties (20%) except on
books, as well as other literary works and
c. A change in the shareholder’s equity results
by virtue of the stock dividend issuance.
d. Distribution of treasury stocks
e. Dividends declared in the guise of treasury
stock dividend to avoid the effects of income
taxation (Commissioner vs. Manning, 66
SCRA 14)
f. Different classes of stock were issued
4. Liquidating Dividend - one resulting from the
distribution by a corporation of all its
property or assets in complete liquidation or
dissolution.

Taxable income refers to the excess of amount

musical compositions, which is subject to tax at received over cost of the share surrendered.
10%.

Item 7. DIVIDENDS FROM DOMESTIC

Item 8. PRIZES AND OTHER WINNINGS
CORPORATION

-Refers to amounts of money in cash or in kind

 If the recipient is another domestic
received by chance or through luck and are
corporation, it is exempt from tax
generally taxable except if specifically mentioned
 If recipient is a resident citizen= 10% FWTX
under the exclusions from the computation of
 If the recipient is a NRA NETB= 25%FWTX or
gross income under section 32 (b).
a lower rate under an applicable tax treaty.
a. Prizes won by persons in any
tournaments in their individual capacity
Taxpayer Dividend paid by a
are taxable
Domestic Corporation
b. Prizes from charity horse race,
RC 10%
sweepstakes, lotto, and bingo bonanza
NRC 10%
RA 10% from PAGCOR are not taxable
NRA-ETB 20% c. All prizes and awards to athletes in local
NRA-NETB 25% or international sports events whether
DC EXEMPT local or international sanctioned by the
RFC EXEMPT Philippine Commissions are not taxable
NRFC 15%-With tax sparing: d. Loyalty awards granted to employees in
30%-without tax sparing recognition of their years’ of service is
taxable to them if such employees belong
Kinds of Dividends:
1. Cash Dividend - paid in given sum of money to the Rank- and -File category whereas,
2. Property Dividend – one paid by corporation if managerial or supervisory, the award
in securities (not its own stock) or other is not taxable to them but the employer is
property subject to Fringe Benefit Tax
3. Stock Dividend - one paid by a corporation e. Prizes won by a ticket/stub holder in a
with its own stock. It represents transfer of raffle draw, is subject to 20% FWTax and
surplus to capital account. It may be of the
not to income tax
same kind or different from that on which it
is issued. f. Prizes and awards made primarily in
recognition of religious, charitable,
General Rule: (as to stock dividends): scientific, educational, ,artistic, literary,
Not subject to income tax if it represents the or civic achievement BUT ONLY IF:
transfer surplus to capital account. (a) The recipient was selected without
any action on his part to enter the
Exception: If it gives the shareholder an interest
contest or proceedings
different from that which his former stockholdings
represented: (b) He is not required to render
a. Shares later redeemed for consideration by the substantial future services as a
corporation or otherwise conveyed by the condition to receiving the prize or
stockholder to the extent of such consideration; award.
b. Recipient is other than the shareholder;
Summary Rules for Prizes and Winnings:
 32 |TAXATION LAW REVIEWER

3. Gains arising from expropriation of

Taxpayer Prizes PCSO All other property constituting as income from
amounting and lotto winnings dealings in property.
to 10,000 winnings and 4. Income derived from illegal sources, such
or less prizes as gambling, theft, embezzlement, and
more smuggling.
than 5. Recovery of damages – taxable.
10,000 6. Bad debts recovery – taxable – if it results
RC, 5-32% EXEMPT 20% in reduction of the taxpayer’s tax liability
NRC, in the previous year. The “Tax Benefit
RA,NRA- Rule” or “Doctrine of Equitable Benefit”
ETB applies in this case.

Item 9. PARTNER’S DISTRIBUTIVE SHARE  must be claimed as a deduction from

FROM THE NET INCOME OF THE GPP
General Professional Partnership – a partnership
formed by persons for the sole purpose of
exercising their common profession no part of
income which is derived from other trade of
business.
A general professional partnership is tax exempt;
however, the individual partners are liable to pay
income tax in their individual capacity on their
share in the net profits of the partnership whether
distributed or not.
In determining his distributive share in the net
income of the partnership, each partner shall
report as gross income his distributive share in
the net income of the partnership, actually or
constructively received.
NOTE: Although, general professional
partnerships are tax exempt said partnerships are
still required to file Income Tax Returns for
Administrative purposes.
the gross income in the preceding year
 the reduction results in a tax benefit
7. Tax refund- taxable – if it results in
reduction of the taxpayer’s liability in the
preceding year.
 must be claimed as a deduction from the
gross income in the preceding year
 the reduction results in a tax benefit
Unrealized foreign exchange gains resulting
from the fluctuation of the foreign exchange rate
between the time the taxpayer recorded a sale in
its books and the time the related receivable was
collected is not taxable income. While for
financial accounting purposes, foreign currency
accounts (e.g., receiveables, liabilities, and
deposits) are periodically restated at the save of
exchange prevailing at year-end, foreign
exchange gain/losses are taxable or deductible, as
the case may be, only in the year of collection,
payment, or actual conversion of the foreign
exchange into pesos. (Talan (Subic) Electric, Inc.
vs CIR, CTA Case No. 6314, March 17, 2006)

Item 10. ANNUITIES Damage recovery. Compensatory damages, as

constituting returns of capital, are not taxable.
– income derived from a capital amount paid to Thus, amounts received as moral damages for
an insurance company. personal actions (such as alienation of affection,
libel, slander or breach of promise to marry) are
Item 11. PENSIONS not taxable.

– paid for past employment services rendered. Recovered damages representing recoveries of lost
profits are taxable, just as profits are taxable in
the regular course of business. Thus, damages
INCOME FROM WHATEVER SOURCE recovered in patent infringement suits are
DERIVED taxable.

Includes all income not expressly exempted within
the class of taxable income under our laws,
irrespective of the voluntary or involuntary action
of the taxpayer in producing the gains (Blas
Gutierrez vs. Collector)
1. Any economic benefit to the employee,
whatever may have been the mode which
it is implemented i.e. stock option.
2. Acquisition and disposition of capital stock
which include sales and retirement of
bonds.
Bad Debt Recovery
Tax Benefit Rule – Bad debts claimed as a
deduction in the preceding year(s) but
subsequently recovered shall be included as part
of the taxpayer’s gross income in the year of such
recovery to the extent of the income tax benefit of
said deduction.
There is an income tax benefit when the deduction
of the bad debt in the prior year resulted in lesser

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012

 33

income and hence tax savings for the company. definition of

(Sec. 4, RR 5- 99) income.
2. Pertain to the 2. Pertain to the
Tax Refund computation of gross computation of
As a general rule, a refund of a tax related to the income. net income.
business or the practice of profession, is taxable 3. Something received 3. Something spent
income (e.g., refund of fringe benefit tax) in the or earned by the or paid in earning
year of receipt to the extent of the income tax taxpayer which do gross income.
benefit of said deduction (i.e., the tax benefit rule not form part of
applies). gross income.

However, the following tax refunds are not to be

included in the computation of gross income:

(EXCEPTIONS) (CAP–IF–FED–VAT) EXCLUSIONS vs. TAX CREDIT

1. Philippine income tax, except the FBT
2. Income tax imposed by authority of any foreign Exclusions Tax Credit
country, if the taxpayer claimed a credit for such Refers to income Refers to an amount
tax in the year it was paid or incurred. received or earned but that is subtracted
3. Estate and donor’s taxes is not taxable as directly from one’s
4. Taxes assessed against local benefits of a kind income because total liability, an
tending to increase the value of the property exempt by law or allowance against
assessed (Special assessments) treaty (De Leon, p. the tax itself, or a
5. Value Added Tax 272). deduction from what
6. Fines and penalties due to late payment of tax is owned.
7. Final taxes
8. Capital Gains Tax CLASSIFICATIONS OF EXCLUSIONS FROM
GROSS INCOME
The enumeration of tax refunds that are not
taxable (income) is derived from an enumeration 1. Under the Constitution
of tax payments that are not deductible from gross
income. If a tax is not an allowable deduction from Income derived by the government or its political
gross income when paid (no reduction of taxable subdivisions - Income derived from any public
income, hence no tax benefit), the refund is not utility or from the exercise of any essential
taxable. governmental function accruing to the
government of the Philippines or to any political
EXCLUSIONS FROM GROSS INCOME subdivision thereof.

Exclusions refer to items or receipts not included 2. Under the Tax Code[Sec. 32 (B)]:
in the determination of the taxable income
because the law or treaty provides that they are The following shall not be included in the
exempt from income tax. computation of the gross income, hence, exempt
from taxation:(LAGCRIM)
EXCLUSIONS vs. DEDUCTIONS 1. Proceeds of life insurance paid to the
beneficiary upon death of the insured
Exclusions Deductions 2. Amount received by the insured as a return of
1. Flow of wealth to the 1. Amounts which premium
taxpayer which are the law allows to 3. Gifts, bequests and devices
not treated as part of be subtracted 4. Compensation for injuries or sickness
gross income for from gross 5. Income exempt under treaty
purposes of income in order to 6. Retirement benefits, pensions, gratuities
computing the arrive at net 7. Miscellaneous items:
taxpayer’s taxable income.
income, due to the a. Income derived by foreign government
following reasons: b. Income derived by the government or its
a. It is exempted by political subdivisions
the fundamental c. Prizes and awards – in recognition of
law; religious, charitable, scientific, educational,
b. It is exempted by artistic, literary or civic achievement subject
statute; to two conditions
c. It does not come d. Prizes and awards in sports competition
within the e. 13th month pay and other benefits
 34 |TAXATION LAW REVIEWER
f. GSIS, SSS, Medicare, Pag-ibig contributions
and Union dues
g. Gains from the sale of bonds, debentures or
other certificate of indebtedness with
maturity of more than 5 years
h. Gains from redemption of shares in mutual
fund
1. Proceeds of Life Insurance
The amount received by the insured is a mere
return of capital, hence, excluded
 The insured procured a life insurance on
his own life.
 If such amounts are held by the insurer
under an agreement to pay interest
thereon, the interest payments shall be
included in gross income.
NOTE: If the proceeds are retained by the
insurer, the interest thereon is taxable
2. Amount received as return of insurance
premium;
The premiums paid are mere return of
capital.
 Any excess between the total premiums
paid and the total premiums received
shall be included in the gross income.
3. Gift, bequest or devise;
Gifts are excluded because they subject to
donor’s tax while bequests and devises are
excluded because these may be subject to
estate tax.
NOTE: Income derived from the property as
gift, bequest or devise is taxable, hence, shall
be included in the gross income.
4. Compensation for personal injuries or
sickness, whether by suit or agreement;
 It is excluded because the amount merely
serves as an indemnity.
It includes amounts received by virtue of:
a. a suit or agreement; or
b. health insurance or accident insurance or
amounts received under Workmen’s
Compensation Acts
NOTE: The phrase “personal injuries” should
be given a restrictive meaning to refer only to
physical injuries.
5. Income exempt under treaty;
Any income, to the extent required by any
treaty obligation binding upon the
Government of the Philippines.
6. Retirement benefits, pension, gratuities;
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
a. Those derived under R.A. 7641 (pertains
to private firms without retirement trust
fund); or
b. those received by officials and employees
of private employers in accordance with a
reasonable private benefit plan
Requisites:
1. in the service of the same employer
for at least 10 years;
2. at least 50 years old;
3. must be availed of only once;
4. plan approved by the BIR.
c. separation pay because of death,
sickness, or other physical disability or
for any cause beyond the control of the
official or employee (e.g. retrenchment);
d. social security benefits, retirement
gratuities, pensions and other similar
benefits received by citizens and aliens
who come to reside permanently here
from foreign sources private or public;
e. benefits due to residents under the laws
of the U.S. administered by the U.S.
Veterans Administration
f. SSS benefits; and
g. GSIS benefits.
7. Miscellaneous items (13FG-PS-GSR)
a. passive income derived in the Philippines
(e.g. investments in loans, stocks, bonds,
or other domestic securities, or from
interest on deposits in banks) by:
i. foreign governments;
ii. financing institutions owned,
controlled, or enjoying refinancing
from foreign governments; and
iii. international or regional financial
institutions established by foreign
governments
b. income derived from any public utility or
from the exercise of any governmental
function;
c. prizes and awards made primarily in
recognition of charitable, civic
achievement, literary, artistic, religious,
educational, and scientific. (CCLARES)
Requisites:
1. recipient selected without any action
on his part; and
2. recipient not required to render
substantial future services
d. prizes and awards granted to athletes in
sports competitions and sanctioned by
their national sports association ;
e. 13th month pay and other benefits up to
P30,000.00;
f. GSIS,SSS, Medicare and union dues of
individuals;

g. gains derived from debt securities with a
maturity of more than 5 years;
h. gains from redemption of shares in
Mutual Fund
3. Under a Tax Treaty
Any income, to the extent required by any treaty
obligation binding upon the Government of the
Philippines.
 RP-Singapore Tax Treaty covers exemption
from income taxes only. Other taxes like VAT
are not exempted. It is submitted that the
same is true with respect to the RP-US Tax
Treaty (p.151, Q&A in Taxation, Dizon).
4. Under Special Laws
Prizes received in charity, horse racing,
sweepstakes from the PCSO (RA No. 1169).
i. Salaries and stipend in dollars received by
non-Filipinos citizens serving as staff of:
 International Rice Research Institute
(RA No. 2707);
 Ford Foundation Grants (RA NO.
3538);
 Agricultural Department of Southeast
Asian Fisheries Development Center
(SEAFDEC) (PD No. 246);
 Population Council of New York (PD
No. 246).
ii. Income from bonds and securities:
 For sale in the international market
(PD No. 81);
 Issued by EPZA (PD No. 66).
Income derived from the installment sales of
houses to their employees and workers or to low-
income groups in housing projects or income
derived from rentals thereof (PD Nos. 745 and
1217 – Housing Program of the government).
Tax Exempt Qualified Senior Citizen
The income of a qualified senior citizen is exempt
from the payment of income tax provided his
annual taxable income does not exceed the poverty
level of P60,000 per year, except interest income.
Compensation of Minimum Wage Earners
(MWEs)
Compensation of MWEs who work in the private
(and public sector not exceeding the minimum in
the non-agricultural sector) and being paid the
statutory minimum wage (SMW), as fixed by the
Regional Tripartite Wage and Productivity Board
(RTWPB)/ National Wages and Productivity
Council (NWPC), applicable to the place where
35
he/she is assigned., including their holiday pay,
overtime pay, night shift differential and hazard
pay.
Under RA 9504, MWEs are exempt from income
tax, hence, exempt from withholding tax.
Exception:
An employee who receives/earns additional
compensation such as commissions, honoraria,
fringe benefits, benefits in excess of the allowable
statutory amount of P30,000.00, taxable
allowances and other taxable income other than
the SMW, holiday pay, overtime pay, hazard pay
and night shift differential pay shall not enjoy the
privilege of being a MWE and, therefore, his/her
entire earnings are not exempt from income tax
and, consequently, from withholding tax.
DEDUCTIONS FROM GROSS INCOME
Nature of Deductions
In general, deductions or allowable deductions are
business expenses and losses incurred which the
law allows to reduce gross business income to
arrive at net income subject to tax.
BASIC PRINCIPLES:
1. The taxpayer seeking a deduction must point
to some specific provisions of the statute
authorizing the deduction; and he must be
able to prove that he is entitled to the
deduction authorized or allowed. (Atlas
Consolidated Mining & Dev. Corp. vs.
Commissioner)
2. Any amount paid or payable which is
otherwise deductible from, or taken into
account in computing gross income or for
which depreciation or amortization may be
allowed, shall be allowed as deduction only if
it is shown that the tax required to be
deducted and withheld therefrom has been
paid to the BIR. (Sec. 34[K])
3. Deductions are kinds of legislative grace.
(Interstate Transit Lines vs. Commissioner)
They are not presumed but allowable only by
reason of specific provisions of law and not
under any general equitable or constitutional
concept. (Baltimore Dairy Lunch Inc. vs. US.
Hence, they are strictly against the taxpayer.
4. Deductions must be paid or incurred in
connection with the taxpayer’s trade,
business of profession.
5. Deductions must be supported by adequate
receipts or invoices (except standard
deduction).
 Deductions for income tax purposes partake of
the nature of tax exemptions; hence, if tax
 36 |TAXATION LAW REVIEWER

exemptions are to be strictly construed, then it KINDS OF DEDUCTIONS:

follows that deductions must also be strictly
construed. 1. Itemized deductions (Sec. 34(A) to (J))
2. Premium Payments on Health and/or
Cohan Rule Principle: Hospitalization Insurance. (RA 8424 section
Under this principle, taxpayers may use estimates 34M)
when they can show that there is some factual 3. Optional Standard Deductions (OSD), (Sec.
foundation on which to base a reasonable 34(L)
approximation of the expense, i.e., they can prove
that they have made a deductible expenditure but Itemized Deductions
just cannot prove how much that expenditure 1. Ordinary and necessary expenses
was. It is the use of estimates or approximations 2. Interests
of the amount of cash and other asserts where the 3. Taxes
taxpayer lacks records. 4. Losses
5. Bad debts
If there is a showing that expenses have been 6. Depreciation of property
incurred but the exact amount thereof cannot be 7. Depletion of oil and gas wells and mines
ascertained due to the absence of receipts and 8. Charitable and other contributions
vouchers of the expenditures involved, the BIR 9. Research and development
will make estimate of the deduction that may be 10. Pension trust contributions of employees
allowed in computing the taxpayer’s taxable
income bearing heavily against the taxpayer Premium Payments on Health and/or
whose inexactitude is f his own making. The Hospitalization Insurance
disallowance of 50% of taxpayer’s claimed - the only deduction which a compensation income
deduction is valid. earner may claim as a deduction.

All Events Test: Requisites for Deductibility:

The accrual of income and expense is permitted
when all-events test has been met. The test
requires:
1) fixing of right to income or liability to pay; and
2) the availability of the reasonable accurate
determination of such income or liability.
1. Income must be either business/professional,
compensation or both;
2. TP must be an individual;
3. Family income is not more than P250,000;
4. Deduction is limited to P2,400 per family or
P200 a month.

The test does not demand that the amount of Optional Standard Deduction (OSD) – in lieu of
income or liability be known absolutely, only that the itemized deductions.
a taxpayer has at its disposal the information
necessary to compute the amount with reasonable RA 9504 allows OSD not only to individual
accuracy. (Commission of Internal Revenue vs. taxpayer (other than NRA) but also to
Isabela Cultural Corp., G.R. No. 1772231, corporations (subject to tax under section 27A and
February 12, 2007) 28A1 of the Tax Code.
Situs of Expenses In lieu of the itemized allowable deductions, the
The place of business becomes the basis if business OSD may be deducted from the gross income as
expenses are deductible for Philippine income tax follows: (Sec 34 L, NIRC; RA 9504)
purposes. As a rule business expenses are
deductible only if they are incurred in relation to
TP Rate Base
the business income taxable in the Philippines.
Individual 40% Gross sales or
receipts from
business or
Deductions vs. Exclusions
profession.
Amounts deducted Amounts/items
Corporation 40% Gross Income.
from gross income to exempt from tax by
arrive at net income. virtue of the Tax Code Requisites:
or special law. 1. The TP signified in the return its
intention to elect OSD;
Deductions vs. Personal Exemptions
2. Such election shall be irrevocable for the
Business expenses Personal expenses
taxable year for which the return is made;
Represent cost of Cover personal, living
3. That individual who is entitled to and
doing business or family expenses
claimed the OSD shall not be required to
Both individual and Only individual TPs
submit with his tax return such financial
corporate TPs may are entitled.
statements otherwise required under the
claim.
Code;

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012

 37

4. Except when the Commission otherwise shall keep such records pertaining to his
permits, said individual shall keep such gross income.
records pertaining to his gross sales or
gross receipts or the said corporation
5. Arose from fires, storms,
shipwreck, or other
Itemized Deductions and Requisites casualties or from
(quick view) robbery, theft, or
embezzlement;
Allowable Requisites for 6. Not claimed as deduction
for estate tax purposes;
Deduction Deductibility
7. Reported to the BIR
1. Ordinary 1. Must be ordinary and
within 45 days from the
and necessary expenses;
occurrence of such loss.
necessary 2. Paid or incurred within
expenses the taxable year;
5. Bad Debts 1. Valid and subsisting
3. Connected with trade,
debt, legally
business or profession;
demandable The TP is
4. Reasonable in amount
the creditor;
5. Supported by sufficient
2. Debt is ascertained to be
evidence;
worthless and
6. Not contrary to law,
uncollectible as of the
morals, public policy, or
end of the taxable year;
public order.
3. Charged-off or written-
off during the taxable
2. Interest 1. There must be an
year;
indebtedness;
4. Connected with TP’s
2. Indebtedness must be
profession, trade or
that of the taxpayer;
business;
3. indebtedness must be
5. Not sustained in a
connected with the
transaction entered into
taxpayer’s trade,
between members of the
business or exercise of
same family or related
profession;
TPs enumerated in
4. Legal liability to pay
Section 36B;
interest;
5. Interest expense must
6. 1. There must be an
have been paid or
Depreciation exhaustion, wear, and
incurred on such
tear (including
indebtedness during the
reasonable allowance for
taxable year;
obsolescence);
2. It must be reasonable;
3. Taxes 1. It must be paid or
3. It must be charged off
incurred within the
during the year;
taxable year;
4. The asset must be used
2. Connected with TP’s
in profession, trade, or
profession, trade or
business;
business;
5. The asset must have a
3. Imposed directly on the
limited useful life;
TP.
7. Depletion 1. It must be reasonable;
4. Losses 1. Actually sustained by the
2. For the exhaustion, wear
TP during the taxable
and tear of property used
year;
in trade or business;
2. Not compensated by
3. It must be expensed
insurance or other forms
(charged off) during the
of indemnity;
taxable year; and
3. Incurred in connection
4. Schedule of allowance
with trade, profession or
must be attached to the
business;
return
4. Evidenced in a closed
and completed
8. Charitable 1. Contribution or gift must
transaction;
and other be actually paid or maid
contributions within the taxable year;
 38 |TAXATION LAW REVIEWER

10. Pension trusts 1. Employer must 2. Given to entity or

have institution specified by
established a law;
pension or 3. Net income of the
retirement plan; institution must not
2. Pension plan inure to the benefit of
must be any private individual or
reasonable; stockholder;
3. Funded by the 4. TP making contribution
employer; must be engaged in
4. Amount trade, profession, or
contributed by business.
the ER must no
longer be 9. Research & 1. Paid or incurred during
subject to his development the taxable year;
control. 2. Connected with trade,
business, or profession.

b. Premium deposits returned to their

Taxpayers who CANNOT Avail of Deductions
from Gross Income:
1. Resident and Nonresident Citizens and
Resident Aliens whose income is purely
compensation income (except for premium
payments on health and/or hospitalization
insurance);
2. Non-Resident Aliens not engaged in trade or
business in the Philippines (sec 34L, NIRC);
and
3. Non-Resident Foreign Corporation
NOTE: Items #2 and #3 are taxed on gross income.
Personal and Additional Exemptions
It is available only to individuals (business income
and compensation income earners).
NRA-ETB may be entitled to personal exemptions
(only) subject to reciprocity, i.e.
a. the country of which he is a subject or
citizen has an income tax law; and
b. the income tax law of his country allows
personal exemption to citizens of the
Philippines not residing therein, but
deriving income therefrom and not to
exceed the amount allowed in CTRP.
 The personal exemption shall be equal to that
allowed by the income tax law of his country
to a citizen of the Philippines not residing
therein, or the amount provided in the CTRP,
whichever is lower.
policyholders.
c. Actual deposits of sums with officers of
the Government of the Phils. (Sec. 37,
NIRC).
ITEMIZED DEDUCTIONS
Itemized deductions are specific business
operating expenses allowed by the Tax Code to be
deducted from the Gross Income as provided in
Section 34 (A) to (J) and Section 34 (M), including
the special deductions allowed to insurance
companies under Sec. 37. Generally, these
deductions require supporting documents to
justify reduction from gross income.
A. GENERAL BUSINESS EXPENSES
Generally include all ordinary and necessary
expenses paid or incurred during the taxable year
in carrying on or which are directly attributable
to, the development, management, operation
and/or conduct of the trade, business or exercise of
a profession.
Meaning of Ordinary and Necessary
Necessary expenses: expenses which are
appropriate and helpful in the development of
taxpayer's business
Ordinary Expenses: expenses which are normal or
usual in the line of business and surrounding
circumstances.

Special Deductions The TWO CONDITIONS MUST CONCUR. A

1. Net Operating Loss Carry-Over (NOLCO)
2. Incentives under RA 8525
3. Special deduction allowed to insurance
companies whether domestic or foreign such
as:
court may decide on when an expense is, or is not,
ordinary, but as much as possible, it will refuse to
substitute its judgment for that of the taxpayer on
the necessity of an expense.

a. net additions to reserve funds within a General Foods, Inc., engaged in the manufacture
year; me beverages, filled its income tax return for the

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012

 39

fiscal year ending February 28, 1985. It claimed
therein advertising expenses as a deduction for
one of its product, "Tang". CIR allowed only 50%
of said deduction, and consequently assessed
respondent with deficiency income taxes saying
that amount of P9,46,246 is not reasonable. May
the advertising expense be allowed as a
deduction?
No, the subject expense for the advertisement of a
single product is ordinarily large. Therefore, even
of it is necessary, it cannot be considered an
ordinary expense.
i. Transportation expenses from
main office to branch, from
branch to main office –
deductible.
ii. Transportation expenses from
office to home; home to office –
not deductible.
iii. If a company car is utilized both
for business and personal use –
proportion to the use.
b. Paid or incurred in the conduct of
trade, business or profession; and
c. Reasonable and necessary expenses.

Advertising is generally of two kinds: 3. Costs of Materials and Supplies

1) advertising to simulate the current sale me Deductible only to the amount actually
merchandise or use of services and consumed or used in operation during the
2) advertising designed to stimulate the future year.
sale of merchandise or use me services. The second 4. Rentals and/or payment for use and
type involves expenditures incurred, in possession of property
whole or in part, to create or maintain some form a. paid for the continued use or
of goodwill for the taxpayer's trade or business or possession, for purposes of trade,
for the industry or profession me which the business or profession;
taxpayer is a member. If the expenditures are for b. for purposes of trade, business or
the advertising me the first kind, then, except as profession;
to the question me the question me the c. taxpayer has not taken or is not
reasonableness of amount, there is no doubt such taking title or in which he has no
expenditures are deductible as business expenses. equity other than that of a lessee,
If, however, the expenditures are for advertising user or possessor
of the second kind, then normally they should be
spread out over a reasonable period of time. 5. Repairs and Maintenance
Incidental or ordinary repairs –
Said advertising expense is of the second kind. deductible from gross income because it
The protection of brand franchise is analogous to keeps the assets in its ordinary working
the maintenance of goodwill or title to one's condition
property. This was akin to the acquisition me
capital assets and therefore expenses related Extraordinary repairs –
thereto were not to be considered as business are not deductible since major repairs
expenses but as capital expenditures. (CIR vs tend to prolong the life of the asset (they
General Foods, Inc., G.R. No. 143672, April 24, are capital expenditures)
2003)
6. Expenses under Lease Agreements
Kinds of Business Expenses:
7. Professional Fees
1. Compensation for Personal Services Deductible in the year the professional
Actually Rendered. It includes gross-up services are rendered, not in the year
monetary value of fringe benefit they are billed.
furnished or granted to the employee
provided that the final tax has been paid. 8. Representation Expenses
These are entertainment, amusement,
Requisites: and recreation expenses incurred or paid
a. Personal services actually rendered; during the year that are directly
b. Compensation is for such services connected to the development,
rendered; and management, and operation of the trade,
c. Reasonable. business or profession of the TP.

2. Traveling Expenses Requisites:

It includes transportation expenses and a. Paid or incurred during the taxable
meals and lodging (Sec. 65 & 66, Rev. year;
Reg. No.2). b. Directly connected to the
development, management and
Requisites: operation of the trade, business or
a. Paid or incurred here and abroad, profession OR directly related to or
“while away from home”; in furtherance of the conduct of his
40 |TAXATION LAW REVIEWER
trade, business or exercise of a
profession;
c. Must not have been paid directly or
indirectly to an official of the
government (including foreign) or
private entity if it constitutes a bribe,
kickback or other similar payment;
d. Not contrary to law, morals, public
policy or public order;
e. Duly substantiated by proof;
f. Must not exceed 1/2% of net sales or
1% of net revenue for TPs engaged in
sales of goods or properties, or sale of
services, respectively. However, if
the TP is deriving income from both,
the allowable deduction shall be
based on an apportionment formula
taking into consideration the
percentage of the net sales/net
revenue to the total net sales/net
revenue, but in no case shall exceed
the maximum percentage ceiling.
Dues paid to social, athletic, or sporting
club or organization per officer; to
professional or business organization –
deductible.
Purchase of propriety shares and playing
rights – not deductible
 Political Campaign Expenses. In the case
of Cruz vs. CIR, G.R. No. 120721,
February 23, 2005, it was held that
political or electoral contributions are
considered gifts under NIRC and are
therefore subject to donor’s tax.
 Under the Omnibus Election Code,
donations or any contribution in cash or
in kind to any candidate form an elective
position, political party or coalition of
parties for campaign purposes is not
subject to donor’s tax provided that the
donor and the done comply with the
requirements of filing tax returns of
contributions with the Comelec [Sec.
99(c) of the Tax Code]
 Donations in kind to politicians, political
parties are subject to 5% withholding tax.
9. Costs/Expenses allowed to private
educational institutions. These are costs
incurred for the expansion of school
facilities.
Private educational institutions may at
its option:
a. Capitalize and claim the annual
depreciation as deduction;
b. Deduct as expenditures during the
taxable year.
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
Non-deductible Expenses (Sec. 36)
1. Personal, living or family expenses;
2. Any amount paid out for new buildings or for
permanent improvements, or
betterments made to increase the value of any
property or estate;
3. Any amount expended in restoring property
or in making good the exhaustion thereof
for which an allowance is or has been made;
or
4. Premiums paid on any life insurance policy
covering the life of any officer or employee, or
of any person financially interested in any
trade or business carried on by the taxpayer,
individual or corporate, when the taxpayer is
directly or indirectly a beneficiary under such
policy.
Litigation expenses incurred in defense or
protection of title are not deductible since they are
capital in nature. They constitute part of the cost
of the property, and are not deductible as
expenses. (Atlas Consolidated Mining &
Development Corporation vs. CIR, G. R. No. L-
26911, January 27, 1981)
Capital Expenditure - an expenditure that
benefits not only the current period but also future
periods. It is not deductible but depreciable,
EXCEPT, if the taxpayer is a non-profit
proprietary educational institution which may
elect either to deduct the capital expense or
depreciate it.
B. INTEREST
Payments for the use of forbearance or detention
of money, regardless of the name it is called or
denominated.
Rules on Deductibility Of Interest Expense
General Rule: The amount of interest expense
paid/ incurred within a taxable year of
indebtedness in connection with the taxpayer’s
trade, business or exercise of profession (TBE)
shall be allowed as a deduction from the
taxpayer’s gross income.
Limitation: Under Section 34 (B) of the 1997 Tax
Code, as amended, the amount of interest paid or
incurred within a taxable year on indebtedness in
connection with the taxpayer’s profession, trade or
business is allowed as deduction from gross
income. However, the taxpayer’s otherwise
allowable deduction for interest expense should be
reduced by 33% of the interest income subjected to
final tax. This is the rule on interest expense
limitation.
Based on the above provision, the amount of
interest expense equivalent to 33% of interest
income subjected to final tax will be non-
deductible, and only the remaining portion of the

interest expense can be claimed as expense in the
income tax computation.
This limitation on the deductibility of interest
expense was legislated specifically to address the
tax arbitrage arising from the difference between
the 20% final tax on interest income and the
regular corporate income tax rate (RCIT) under
which interest expense can be claimed as a
deduction.
Tax Arbitrage - It is a strategy by which a
taxpayer takes advantage of the difference in tax
rates or tax systems as the basis for profit.
It is an income tax benefit that accrues to the
taxpayer because of the disparity on tax rates
applicable to different types of income. Its purpose
is to discourage businessmen who have money
from resorting to borrowing to get a tax
advantage. The limitation on interest expense is
an example of tax arbitrage.
Illustration:
On January 1, 2011, Corporation X borrowed from
a local bank an amount of P500,000 at a 10%
annual interest (resulting to interest
expense). Immediately thereafter, the proceeds of
the loan were placed in a local bank deposit
account which earns a 10% annual interest rate
(resulting to interest income).
Assuming that the rule on interest expense
limitation is not yet in place, the interest expense
of P50,000 (10% of P500,000) will result to a tax
benefit of 30% or P15,000 in 2011; while the
interest income of P50,000 (10% of P500,000),
being a passive income will only be subjected to
final tax of 20% or P10,000. The taxpayer would
derive a net benefit of P5,000 from the combined
effect of a lower rate of final tax liability and a
higher rate of tax deductibility.
Realizing the negative impact of tax arbitrage on
revenue generation, the interest expense
limitation was legislated.
Reduction of Interest Expense by Interest Income
a. TP’s interest expense shall be reduced by an
amount equal to thirty-three percent (33%) of
interest income earned subject to final tax.
b. Interest incurred or paid by the TP on all
unpaid business related taxes shall be fully
deductible from gross income and shall not be
subject to the limitation on deduction.
Optional Treatment of Interest Expense
At the option of the taxpayer, interest incurred
to acquire property used in trade or business
may be allowed as a deduction or treated as
capital expenditure. [Sec 34 (B) (3)]
Non-deductible Interest
a. Interest on loan between taxpayers.
41
b. Interest on loan paid in advance through
discount by individual TP reporting income on
cash basis.
c. If indebtedness is incurred to finance
petroleum operations.
C. TAXES
Pertains to taxes proper which does not include
surcharges, penalties, or fines incident to
delinquency.
Nature and Scope:
All taxes, whether national or local paid or
accrued within the taxable year, in connection
with the taxpayer’s trade or business except:
1. Philippine income tax;
2. Foreign income tax if claimed as tax credit;
3. Estate and donor’s taxes;
4. Special assessments.
Exceptions:
1. Taxes of shareholder upon his interest as
such and paid by the corporation without
reimbursement from him can be claimed
by the corporation as a deduction.
2. A corporation paying the tax for the holder
of its bond or other obligations containing
a tax-free covenant clause cannot claim
deduction for such taxes paid by it
pursuant to such covenant (Sec. 80, Rev.
Reg. No. 2).
TAX CREDIT – the TP’s right to deduct from
income tax due the amount of tax he has paid
to a foreign country, subject to limitations.
Taxes paid in foreign countries may be
treated as:
1. TAX CREDIT – reduces the tax liability
itself
2. DEDUCTION – merely reduces net
income which serves as basis for the tax
Who are entitled to tax credit?
1. Resident Citizens
2. Domestic Corporations, which include
business partner
3. Members of the professional
partnerships
4. Beneficiaries of estates and trusts
Who are not entitled to tax credit?
1. Nonresident Citizens,
2. Resident and Nonresident Aliens
3. Resident and Nonresident Foreign
Corporations
 42 |TAXATION LAW REVIEWER

The excess over the net book value immediately

For NRA-ETB and RFC, taxes paid or
incurred are allowed as deductions only if
and to the extent that they are connected
from income within the Philippines.
Requirements to avail tax credit
1. total amount of income derived from
sources without the Philippines;
2. amount of income derived from each
country, the tax paid or incurred to which
is claimed as credit;
3. all other information necessary for the
verification and computation of such
credits.
TAX CREDIT vs. TAX DEDUCTION
before the casualty should be capitalized, subject
to depreciation over the remaining useful life of
the property.
In case of a taxpayer, other than a corporation,
only the following percentages of the gain or loss
recognized upon the sale or exchange of a capital
asset shall be taken into account in computing
the net capital gain, net capital loss and net
income:
1. One hundred percent (100%) if the
capital asset has been held for not more
than twelve (12) months.
2. Fifty percent (50%) if the capital asset
has been held for more than twelve (12)
months (Sec 39 [B], NIRC)

Tax Credit Tax Deduction 3. SPECIAL LOSSES

Deductible from gross Deductible from
income Philippine income a. Losses on wash sales of stocks or
tax securities: not deductible because these
Sources: deductible Sources: Foreign are artificial loss
taxes such as business income, war-profits
tax, excise tax, and excess profit tax b. Wagering losses: deductible only to the
percentage tax, and extent of gain/ winnings (Sec. 34[D][6]).
other business-
connected taxes Wash sales – a sale or other disposition of stock or
securities where substantially identical securities
are acquired or purchased within 61-day period,
D. LOSSES beginning 30 days before the sale and ending 30
days after the sale (Sec. 38).
Types of Losses:
General Rule: Losses from wash sales are not
1. CAPITAL LOSSES – deductible only to the deductible.
extent of capital gains
a. losses from sale/ exchange of capital Exception: When the sale is made by a dealer in
assets stock or securities and with respect to a
b. losses resulting from securities transaction made in the ordinary course of the
becoming worthless and which are business of such dealer, losses from such sale is
capital assets deductible.
c. losses from short sale of properties
d. losses due to failure to exercise Elements of Wash Sales:
privilege or option to buy/ sell 1. The sale or other disposition of stock
property resulted to a loss;
2. There was an acquisition or contract or
option for acquisition of stock or securities
2. ORDINARY LOSSES – incurred in the within 30 days before the sale or 30 days
course of trade, business or practice of after the sale; and
profession 3. The stock or securities sold were
substantially the same as those acquired
Total Destruction – total book value (cost within the 61-day period.
less accumulated depression) less any
amount of insurance or c. Abandonment losses in petroleum
compensation received operation and producing wells.
(Sec. 34 [D][7])
Partial Destruction – the replacement
cost to restore the property to its normal In case a contract area where petroleum
operating condition, but in no case shall operations are undertaken is partially or
the deductible loss be more than the net wholly abandoned, all accumulated
book value of the property before the exploration and development
casualty. expenditures pertaining thereto shall be
allowed as a deduction.

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012


In case a producing well is abandoned,
the unamortized cost thereof, as well as
the undepreciated cost of equipment
directly used therein, shall be allowed as
deduction in the year the well, equipment
or facility is abandoned.
d. Losses of mines other than oil and gas
wells
e. Losses due to voluntary removal of
building incident to renewal/
replacements – deductible expense from
gross income.
f. Loss of useful value of capital assets due
to changes in business conditions –
deductible up to the extent of actual loss
sustained (after adjustment for
improvement, depreciation and salvage
value).
g. Losses from sales or exchanges of
property between related taxpayers –
losses of this nature are not deductible
but gains are taxable.
h. Losses of farmers – if incurred in the
operation of farm business, it is
deductible.
4. NET OPERATING LOSS CARRY-OVER
(NOLCO)
It refers to the excess of allowable deductions
over gross income of the business for any taxable
year which had not been previously offset as
deduction from gross income.
General Rule: it can be carried over as a
deduction from gross income for the next 3
consecutive years immediately following the
year of such loss.
Exception: any net loss incurred in a taxable
year during which the taxpayer was exempt
from income tax shall not be allowed as
deduction.
For mines, other than oil and gas well, net
operating loss incurred in any of the first ten years
of operation may be carried over as deduction for
the next five (5) years immediately following the
year of such loss provided there is no substantial
change in ownership
Requirements to avail of NOLCO:
1. The taxpayer was not exempt from income
tax in the year of such net operating loss;
2. Of property connected with the trade,
business or profession, if the loss arises from
43
fires, storms, or other casualties or from
robbery, theft or embezzlement;
3. There has been no substantial change in the
ownership of the business or enterprise.
4. not less than 75% in nominal value of the
outstanding issued shares is held by or on
behalf of the same persons; or
5. not less than 75% of the paid up capital is
held by or on behalf of the same person.
The taxpayer’s failure to record in his books the
alleged loss proves that the loss had not been
suffered, hence, not deductible (City Lumber vs.
Commissioner).
Loss from Theft or Embezzlement
1. deductible in the year in which it was
sustained
2. no means of determining the actual date of
embezzlement – year of discovery (Boston
Consolidated Gas Co. vs. Commissioner.,
126F [2d] 437).
3. Modified by the application of the bad debt
theory which holds that since the
embezzlement of the funds creates a debtor-
creditor relationship the loss is deductible
as BAD DEBT in the year when the right of
recovery became worthless.
E. BAD DEBTS
These are debts due to the taxpayer which are
actually ascertained to be worthless and charged
off within the taxable year.
A debt is valid if there exists the relationship of a
debtor and creditor. It is not necessary that the
debt shall be due in the sense that it is then
collectible. It must be an outstanding obligation,
which if not due at the time, will certainly become
due at some future date (Budsboro Steel Foundry
& Machine Co. vs. U.S., 12 AFTR 1948)
Where the debt, however, is subject to a
contingency did not occur, there is no valid
subsisting debt (Evans Clark, 18TC 780)
Repayment of debt is essential for the existence of
the debt. Understanding that the payment of the
alleged debt would never be demanded- there is no
debt within the contemplation of law.
Exception: even if the debt be uncollectible from
its inception, it is the right of the endorser or
guarantor to deduct payment which he is
required to make upon default of the primary
debtor.
Factors affecting Worthlessness of a Debt
(2004 Bar)
1. Bankruptcy or insolvency of the debtor;
2. Insufficiency of the collateral;
 44 |TAXATION LAW REVIEWER
3. Statute of limitation
4. Death of the debtor leaving no assets;
5. Injury of the debtor making it impossible for
him to earn a living (Sec.10, Rev. Reg. No. 2;
1955 CCH Fed. Tax Course, par. 502)
6. Meager amount involved;
7. Improbability of success of judicial
collection;
8. Destruction by fire of original invoices
evidencing the indebtedness (Goodwill
International Rubber Co. vs. Collector, CTA
Case No. 468, 8 June 1963).
 A taxpayer may not defer deduction to a
later year of a bad debt. If the charge off
is made in a later year, the deduction
will be disallowed (Collector vs.
Goodrich International Rubber Co., 21
SCRA 1336, 1314).
 Deductible bad debts of Domestic and
Resident Foreign Corporations – only
business debts
 Nonresident Foreign Corporation – not
entitled
Equitable Doctrine of Tax Benefit Rule
A recovery of bad debts previously deducted
from gross income in the preceding year or years
shall be included as part of the taxpayer’s gross
income in the year of such recovery to the extent
of the income tax benefit of said deductions.
NOTE: Securities becoming worthless are not
bad debts.
If securities are ascertained to be worthless and
charged off within the taxable year and are
capital assets, the loss resulting therefrom
shall, in the case of a taxpayer (other than a
bank or trust company incorporated under the
laws of the Philippines a substantial part of
whose business is the receipt of deposits), be
considered as a loss from the sale or exchange,
on the last day of such taxable year, of capital
assets.
China Banking Corp. (CBC) made a 53% equity
investment in the First CBC Capital Ltd., a
Hongkong subsidiary engaged in financing and
investment with deposit-taking function. Upon
the examination of BSP, First CBC was declared
insolvent. With BSP's approval, CBC was forced
to write-off as worthless investments in First CBC
in its 1987 ITR and treated as bad debts or as an
ordinary loss deductible from the gross income.
CIR disallowed the deduction saying that it should
be classified as "capital loss", there being no
indebtedness to speak of.
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
Can CBC claim the write-off of worthless
securities as ordinary loss deductible from gross
income?
No. Shares of stock would be ordinary assets only
to a dealer in securities or a person engaged in the
purchase and sale of, or an active trader (for his
own account) in securities. In the case at bar,
First CBC Capital, the investee corporation is a
subsidiary corporation of CBC whose shares in
said investee corporation are not intended for
purchase or sale but as an investment; thus
considered as a capital asset. As a result, any loss
therefrom would be a capital loss, not an ordinary
loss, to the investor. Capital losses are allowed to
be deducted only to the extent of capital gains, i.e.,
gains derived from the sale or exchange of capital
assets, and not from any other income of the
taxpayer.
Can the loss of CBC in its equity investment in the
Hongkong subsidiary be deductible as a bad debt?
No. The shares of stock in question do not
constitute a loan extended by CBC to its
subsidiary (First CBC Capital) or a debt subject to
obligatory repayment by the latter, which are
essential elements to constitute a bad debt.
Instead it is a long term investment made by CBC.
(China Banking Corporation vs. Court of Appeals,
G.R. No. 125508, July 19, 2000)
Measure of Bad Debts Deductible
a. Generally the entire amount of the bad debt.
b. Not necessarily so in the following instances:
i. Unpaid wages paid in promissory note –
amount deductible is the value of the
note and not the amount of the unpaid
salary or wages;
ii. Distribution of the decedent’s assets-
only the difference between creditor’s
claim and property received from the
estate;
iii. Account receivable becoming worthless
in the hands of the purchaser – only the
amount which represents the purchase
price and not the face value of the note;
iv. Foreclosure of mortgages:
iv.a. only the difference between the
debt and the proceeds of the sales
is generally deductible as bad
debts;
iv.b. if no foreclosure occurs and the
debtor surrenders the property to
the creditor – difference between
the basis of the debt and FMV of
the property deductible (Sec. 103,
Rev. Reg. No. 2).
v. If creditor buys the mortgaged property
and credits the debt with the purchase
price even if such price is less than the
indebtedness – no deductible bad debt,
the security taking place of the debt.

vi. Debt partially secured by a mortgage is
deductible only to the extent not covered
by mortgage.
vii. A debt compromised is deductible to the
extent compromised or the amount
absolved if the debtor is insolvent.
viii. Unpaid wages, salaries, rents and other
similar income, deductible in full
provided the same is returned as
income.
F. DEPRECIATION
It is the gradual diminution in the useful (service)
value of tangible property used in trade,
profession or business resulting from exhaustion,
wear and tear, and obsolescence. It applies also to
the amortization of the value of intangible assets,
the use of which in trade or business is definitely
limited in duration (Basilan Estates, Inc. vs.
Commissioner, 21 SCRA 17, 5 September 1967).
Includes:
1. The gradual diminution in the service or
useful value of tangible property due from
exhaustion, wear and tear and normal
obsolescence;
2. Amortization of the value of intangible
assets with definitely limited duration.
Who are entitled to deduction?
General Rule: There shall be allowed as a
depreciation deduction a reasonable allowance for
the exhaustion, wear and tear (including
reasonable allowance for obsolescence) of property
used in the trade or business.
In case of NRA-ETB or RFC, depreciation shall be
permitted only when such property is located in
the Philippines.
In case of property held by one person for life with
remainder to another person, the deduction shall
be computed as if the tenant were the absolute
owner of the property, hence, deduction shall be
allowed to him.
In case of property held in trust, the allowable
deduction shall be apportioned between the
income beneficiaries and the trustees in
accordance with the pertinent provisions of the
instrument creating the trust, in the absence of
such provision, on the basis of the trust income
allowable to each.
Methods of Depreciation
1. Straight Line Method: the total depreciation
is spread in equal amounts over the useful life
of the asset.
2. Declining Balance Method: The amount of
depreciation is deducted every year from the
45
cost or other basis of the property and the rate
(usually 1.5 to 2 times the straight line rate)
is applied to the resulting balance. The rate
is applied to the cost (or other basis) for the
first year and to the depreciated book
3. value for each of the succeeding years. The
book value decreases every year because of
the yearly depreciation expense.
4. Sum-of-the-Years Digit Method: Where larger
depreciation charges are provided in the
earlier years if the life of an asset which
gradually diminish until the total
depreciation is equal to the cost of the asset.
5. Any other method which may be prescribed by
the Secretary of Finance upon
recommendation of the Commissioner (De
Leon, pp. 370-371)
Capital Expenses of a Private Educational
Institution
The capital expenditures of a private educational
institution may be treated in the following
options:
1. Deduct immediately as expenditures; or
2. Deduct as allowances for depreciation.
G. DEPLETION EXPENSE
Depletion is the exhaustion of natural resources
like mines, oil and gas wells due to production. It
is similar to depreciation allowance, the purpose
of which is to recover the invested capital in the
property.
Persons entitled to claim depletion allowance
Annual depletion deduction are allowed only to
mining entities which own an economic interest in
mineral deposit or those which have capital
investment in the mineral deposit. (Sec. 3, Rev.
Regulation No. 5-76).
In the case of a resident foreign corporation or an
alien individual engaged in trade or business in
the Phils. allowance for depreciation of oil and gas
wells or mines shall be authorized only in respect
to oil and gas wells or mines located within the
Phils. (Sec. 34 [G, 3], NIRC).
Economic Interest – interest in minerals in, placed
investment therein or secured by operating or
contract agreement for which income is derived,
and return of capital expected from the extraction
of mineral.
NOTE: Mere economic/ pecuniary advantage to be
derived when there is no capital investment is
involved, does not amount to economic interest.
H. CHARITABLE & OTHER CONTRIBUTIONS
 46 |TAXATION LAW REVIEWER

4. non-government organizations (Sec 34

Kinds of contributions allowed as deduction:
1. Special or contributions deductible in full
2. Ordinary or contributions with limit or
subject to limitation
Contributions Deductible in Full
The law specified these contributions as
deductible in full amount. Donations to:
1. Philippine government or to any of its agencies,
or political subdivisions, including fully-owned
government corporations undertaking priority
activities in:
a. Science
b. Culture
c. Health
d. Human settlements
e. Education
f. Economic development
g. Youth and sports development
2. Foreign institutions or international
organizations, pursuant to agreements,
treaties or commitments entered into by the
Phil. Government or special laws;
3. Donations to certain accredited NGO’s subject
to the following requisites to be deductible in
full:
a. not more than 30% of which should be
used for administration purposes;
b. the contribution must be utilized not
later than the 15th day of the 3rd month
after the close of its taxable year;
c. upon dissolution, a court shall distribute
the assets to another non-profit domestic
corporation (organized for same purpose)
or to the state, or to another similar
organization.
Such NGO is organized and operated
exclusively for:
a. Scientific
b. Research
c. Educational
d. Character-building and youth and
sports development
e. Health
f. Social welfare
g. Cultural
h. Charitable purposes
Partial Deduction - donations to the following:
1. Philippine Government or any of its
agencies or any political subdivision thereof
exclusively for public purposes;
2. Accredited domestic corporation or
associations organized and operated
exclusively for religious, charitable,
scientific, youth and sports development,
cultural or educational purposes or for the
rehabilitation of veterans;
3. social welfare institutions; or
[H])shall be deductible only to the extent:
 in case of a corporation, not in excess of
5% of taxable income
 in case of an individual, not in excess of
10% of the taxable income
In case of NGO’s, it must be accredited or
organized for any of the purpose s enumerated for
the donation to qualify as deduction, irrespective
whether deductible in full or not.
These donations must be properly documented to
be deductible.
The amount of any charitable contribution of
property other than money shall be based on the
acquisition cost of said property.
H. PENSION TRUST CONTRIBUTION
It is a deduction applicable only to the employer
on account of its contribution to a private pension
plan for the benefit of its employees. This
deduction is purely business in character.
An employer is allowed to deduct from business
gross income contributions or payments made to
pension trust in accordance with a “reasonable
private benefit plan”. (RA 4917, Sec 32B(6A),
NIRC)
I. RESEARCH AND DEVELOPMENT (R&D)
Treatment of the R&D Expenditures
A TP has the option to consider R & D
expenditures that are paid or incurred during the
taxable year in connection with profession, trade
or business either as:
1. Ordinary and necessary expenses deductible
from the business gross income in the year
the expenses are paid or incurred.
2. Deferred expenses chargeable to the capital
account but not chargeable to property
subject to depreciation or depletion.
If the R & D expenditures are treated as deferred
expenses, such expenses will be allowed as
deductions ratably distributed over a period of not
less than 60 months beginning with the month in
which the TP first realizes the benefits from such
expenditures. (Sec. 34 I, NIRC)
Expenses not considered as R&D:
1. Expenditures for the acquisition or
improvement of land, or for the
improvement of property to be used in
connection with R&D of a character which
is subject to depreciation and depletion; and

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012


2. Expenditures paid or incurred for the
purpose of ascertaining the existence,
location, extent or quantity of any deposit
or ore or other mineral including oil or gas.
Premium Payments on Health and/or
Hospitalization Insurance
It is an amount of premium on health and/or
hospitalization paid by an individual taxpayer, for
himself and members of the family during the
taxpayer.
OPTIONAL STANDARD DEDUCTIONS (OSD)
They may be elected in lieu of itemized deductions
and merely a privilege enjoyed by certain
taxpayers.
 In case of individuals (other than a
nonresident alien) may elect a standard
deduction in an amount not exceeding 40% of
his gross sales or gross receipts;
 In case of corporations, they are now given the
option to avail of the OSD at 40% of their
gross income (as amended by R.A. 9504).
Unless the taxpayer signifies in his return his
intention to elect this deduction, he is considered
to have availed of the itemized deductions. Such
election, when made by the qualified taxpayer, is
irrevocable for the year in which it is made.
Itemized deduction vs. OSD.
In itemized deduction, it must be substantiated by
receipts; while OSD requires no proof of expenses
incurred because the allowable deduction is 40%
of gross sales or receipts.
KINDS OF TAXPAYERS
Under Sec 22(N), a taxpayer is any person subject
to [income] tax. Income taxpayers, with
distinction based on the amount of income subject
to tax, or the applicable tax rates, or both, are
classified as follows:
A. Individuals
Natural Persons
1. Resident Citizens
2. Non-resident Citizens
3. Resident Aliens
4. Non-resident Aliens
a. Engaged in Trade or Business
b. Not engaged in Trade or Business
Artificial Persons
1. Taxable Estate
47
2. Taxable Trusts
Taxable Estate- refers to the mass of
properties left by a deceased person and
which is under administration or judicial
settlement.
 Property, rights and obligations of a
person which are not extinguished by his
death and those that accrues thereto;
taxed in the same way as an individual
provided it is irrevocable and earns
income; what is taxed is not the property
that constitutes the trust (this was
already subject to donor’s tax) but the
income of such property.
Taxable Trusts – trust, the income of which is
to be accumulated, or in which the fiduciary
may, at his discretion, either distribute or
accumulate income.
 Arrangement created by agreement
under which title to property is passed to
another for conservation or investment
with the income and the corpus/principal
distributed in accordance with the
directions of the creator.
To be taxable as a separate entity, grantor
must have absolutely and irrevocably given
up control and benefit over the trust.
B. Corporation – includes partnerships, no
matter how created or organized, joint stock
companies, joint accounts, associations or
insurance companies except:
 Joint construction venture
 General professional partnership
 Joint venture for engaging in petroleum,
coal, geothermal and other energy
operations pursuant to a consortium
agreement with the government.
Domestic – those created or organized in the Phil.
or under its laws.
Foreign– any corporation created under foreign
laws.
a. Resident foreign – those engaged in trade or
business within the Phil.
b. Non-resident foreign – those not engaged in
trade or business within the Phil.
A. Individual Taxpayers
1. Citizens
a. Resident citizens (RC) – those citizens of
the Philippines residing therein is
taxable on all income derived from
sources within and without the
Philippines.
48 |TAXATION LAW REVIEWER
b. Non-resident citizens (NRC) –taxable on
income derived from sources within the
Philippines, which includes a Filipino
citizens:
1. Who establish to the satisfaction of
the commissioner the fact of his
physical presence abroad with a
definite intention to reside therein;
2. Who leave the Philippines during the
taxable year to reside abroad, either
as an immigrant or for employment
on a permanent basis;
3. Who work and derive income from
abroad and whose employment
thereat requires him to be physically
present abroad most of the time (at
least 183 days, need not be
continuous) during the taxable year;
Exceptions:
Overseas Filipino Workers – those
who are physically present abroad
most of the time during the taxable
year and taxable only on income
derived from sources within the
Philippines.
Seamen – considered as an OFW
provided the following requirements
are met:
a. They receive compensation for
services rendered abroad as a
member of the complement of a
vessel; and
b. Such vessel is engaged
exclusively in international
trade.
4. Who is previously considered as a
non-resident and who arrives in the
Philippines at anytime during the
taxable year to reside thereat
permanently shall be considered
non-resident for the taxable year in
which he arrives in the Philippines
with respect to his income derived
from sources abroad until the date of
his arrival.
NOTE: The taxpayer shall submit
proof to the Commissioner to show
his intention of leaving the
Philippines to reside permanently
abroad or to return to and reside in
the Philippines as the case may be.
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
2. Aliens
a. Resident Aliens (RA) – those whose residence
is within the Philippines and who is not a
citizen thereof is taxable only on income
derived from sources within the Philippines.
 Those who come to the Philippines for a
definite purpose which in its nature
would require an extended stay, and
make their home temporarily in the
country become resident aliens.
 Length of stay is indicative of intention.
Aliens who shall have stayed in the
Philippines for more than one year by
the end of the calendar year are resident
aliens.
b. Non-Resident Aliens (NRA) – those whose
residence is not within the Philippines and
who are not citizens thereof.
b.1. Non-resident aliens Engaged in trade
or business (NRA-ETB) – those whose
residence is not within the Philippines
and who are not citizens thereof but doing
business therein are taxable only on
income from sources within.
 Trade or Business – includes the
performance of the functions of a
public office; but excludes
performance of services by taxpayer
as an employee.
 A NRA who shall come to the
Philippines and stay for an aggregate
period of more than 180 days during
any calendar year shall be deemed a
non-resident alien doing business in
the Philippines (Sec. 22 [G])
notwithstanding (Sec. 25 [A][1],
NIRC).
b.2. Non-resident aliens Not engaged in
trade or business (NRA-NETB) – those
whose residence is not within the
Philippines and who is not a citizen and
not doing business therein are liable for
income derived from sources within the
Philippines.
2.Special Class of Individual Employees
a.Minimum Wage Earner (MWE)
 Worker in the private sector paid the
statutory minimum wage.
 Employee in the public sector with
compensation income of not more than the
statutory minimum wage in the non-
agricultural sector where he/she is assigned.

NOTES:
1. Minimum Wage Earners shall be exempt
from the payment of income tax on their
taxable income.
2. The holiday pay, overtime pay, night shift
differential pay and hazard pay received shall
likewise be exempt from income tax.
3. Corporations
Domestic Corporations (DC) – a corporation
created or organized in the Philippines or
under its laws and is liable for income from
sources within and without.
Foreign Corporations (FC)
a. Resident Foreign Corporations (RFC) –
a corporation which is not domestic and
engaged in trade or business in the
Philippines is liable for income from
sources within.
NOTES:
1. In order that a foreign corporation
may be regarded as doing business
within the State, there must be
continuity of conduct and intention
to establish a continuous business,
such as the appointment of a local
agent, and not one of a temporary
character.
2. “Doing business” includes –
i. Soliciting orders, service contracts,
opening offices, whether called ‘liason’
offices or branches;
ii. Appointing representatives or
distributors domiciled in the
Philippines or who in any calendar
year stay in the country for a period
or periods totalling 180 days or more;
iii. Participating in the management,
supervision or control of any domestic
business, firm, entity or corporation
in the Philippines;
iv. Any other act or acts that imply a
continuity of commercial dealings or
arrangements, and contemplate to
that extent the performance of acts or
works, or the exercise of some of the
functions normally incident to, and in
progressive prosecution of,
commercial gain or of the purpose and
object of the business organization.
b. Non-resident Foreign Corporations
(NRFC) – a corporation which is not
domestic and not engaged in trade or
business in the Philippines is liable for
income from sources within.
4. Partnerships
49
1. Taxable or Business Partnerships
 All other partnerships no matter how
created or organized.
 Includes unregistered joint ventures
and business partnerships.
Not taxable when:
a. Undertaking construction projects
b. Engaged in petroleum, coal and
other energy operation under a
service contract with the
government.
2. General Co-partnerships (GCP)
 Partnerships which are by law
assimilated to be within the context of,
and so legally contemplated as
corporations. Partnership itself is subject
to corporate taxation while individual
partners are considered stockholders
and, therefore, profits distributed to them
by the partnership are taxable as
dividends.
3. General Professional Partnerships
(GPP)- A partnership formed by persons
for the sole purpose of exercising their
common profession, no part of the income
of which is derived from engaging in any
trade or business.
 General Professional Partnership is not
considered as a taxable entity for income
tax purposes. The partners themselves,
not the partnership (although it is still
obligated to file an income tax return),
are liable for the payment of income tax
in their individual capacity computed on
their respective distributive shares of the
partnership profit.
Co-ownerships
There is co-ownership whenever the
ownership of an undivided thing or right
belongs to different persons.
Instances when co-ownership exists:
a. Two or more heirs inherit an
undivided property from a decedent.
b. A donor makes a gift or an undivided
property in favor of two or more
donees.
NOTES:
It is not taxable when the activities are limited
merely to the preservation of the co-owned
property but co-owners are liable for income tax in
their separate and individual capacities. It is
taxable when the income of the co-ownership is
invested by the co-owners in business creating a
partnership.
 50 |TAXATION LAW REVIEWER

TAXPAYER’S RETURNABLE INCOME AND APPLICABLE TAX

TAXPAYERS INDIVIDUALS CORPORATIONS PARTNERSHIPS ESTATES

AND TRUSTS
Compensation Business Income Trading Income Business
INCOME Profession Business from Income
Business Income Profession
Itemized Itemized Itemized Itemized Itemized
deductions deductions deductions deductions deductions
or or or or or
DEDUCTIONS 40% OSD based 40% OSD based on 40% OSD 40% OSD 40% OSD like
on gross sales or gross income based on based on individual TP
gross receipts gross income gross
from business or receipts Distribution to
profession beneficiaries
Basic P50,000
PERSONAL
EXEMPTIONS Additional Basic P20,000
P25,000 per
child
(maximum of 4)
Schedular (Tax Normal Corporate Normal Tax Schedular
TAX RATE on Individuals) Income Tax 30% Corporate Exempt (Tax on
Or Income Tax (Share of Individuals)
5-32% MCIT (2%) 30% each
Or partner to 5-32%
MCIT (2%) be reported
in his
individual
return)

TAX ON INDIVIDUALS

Summary and Treatment of Income (Quick view)

Taxpayers and Types Within Without Itemized OSD Exemption Tax rate
of Income deduction (Sec (Sec 35)
34L,
RA
9504)
A. Resident Citizen (RC)
Compensation
Income Yes Yes No No Yes Tabular (Sec. 24A)
Income from
Profession Yes Yes Yes or Yes Yes Tabular (Sec. 24A)
Business Income Yes Yes Yes or Yes Yes Tabular (Sec. 24A)
Passive Income* Yes Yes* No No No Final
Tax(Sec.24B,C,D)
*Tabular (Sec 24A)
B. NRC and RA
Compensation
Income Yes No No No Yes Tabular (Sec. 24A)
Income from
Profession Yes No Yes or Yes Yes Tabular (Sec. 24A)
Business Income Yes No Yes or Yes Yes Tabular (Sec. 24A)
Passive Income Yes No No No No Final Tax (Sec
24B,C,D)

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012

51
 52 |TAXATION LAW REVIEWER

C. NRA-ETB
Compensation
Income Yes No No No R Tabular (Sec. 24A)
Income from
Profession Yes No Yes No R Tabular (Sec. 24A)
Business Income Yes No Yes No R Tabular (Sec. 24A)
Passive Income Yes No No No No Final Tax (Sec
24B,C,D)

D. NRA-NETB Yes No No No No 25% of Gross Income

and apply Sec. 24 C
&D
E. Special taxpayers
employed by: Yes No No No No 15% of gross income
1. Regional Head office Apply Sec. C & D,
of Multi-national and 25% for other
Corporation assigned in income
the Phils.
2. Offshore Banking
Units
3. Petroleum Service
Contractor

Sec 24 A = Normal tabular Rate for Individual TP Sec. 24B= Tax rate for passive
income
Sec. 24C= Tax rate for sale of shares of stock outside the stock exchange Sec. 24 D= Tax rate for sale of
real property
Sec. 34 A to K = Itemized Deductions Sec. 34L, RA 9504= OSD of 40%
of gross sales or receipts
R= Subject to Reciprocity

Tax Base and Tax Rates (Quick View)

Category of Income RC RA NRC NRA-EBT NRA-NETB
All sources Within Within Within Within
1.Compensation, Business, Based on Taxable Income GIW
Profession Schedular Normal Tax Rate (Sec. 24A) 25%
2. Prizes of P10,000 or less
3.Proprietary Not
Educational/hospital applicable
4. Cinematographic film and the GIW 25%
like
5.Interest,royalty,
winnings/prizes except prizes Gross income within – 20% FWT
of P10,000 & below GIW
6.Royalties-books, literary, Gross income within – 10% FWT 25%
musical
7.Interest (long term E X E M P T
investment) –savings, common In case of pretermination, remaining maturity of;
or individual trust funds, 4 years to less than 5 years = 5%
deposit substitute investment 3 years to less than 4 years = 12%
management account in Less than 3 years = 20%
denomination of P10,000 or as
prescribed by the BSP
8. Cash/property dividends GIW = 10% FWT GIW =
20%
9. Interest (FCDS) GIW = 7.5% FWT E X E M P T
10. Capital gains on shares (not Net capital gains within=5%(not over P100,000): 10% (in excess of
traded in stock exchange P100,000)
11. Sale of shares (traded in ½ of 1% of the selling Price, Business Tax
stock exchange)
12. Capital gains on sale of real Gross sales price or FMV, whichever is higher, 6%
property

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012

 53

13.Winnings on Phil. EXEMPT

Sweepstakes/lotto
All passive income derived by RC outside the Phils. are subject to normal (schedular) tax in the Phils. (Sec
24A)

Taxation of Individual’s Business Income

Classification Source Tax base Tax rate

RC Within/without GI – (Ded + PE) 5% to 32%
NRC Within only GI – (Ded + PE) 5% to 32%

RA Within only GI – (Ded + PE) 5% to 32%

NRA-ETB Within only GI – (Ded + PE, 5% to 32%
subject to reciprocity)
NRA-NETB Within only Gross income 25%
 Personal Exemption (PE) is P50,000 for TP and P25,000 per qualified dependent child, maximum of four (4)
 Deduction comes in the form of itemized or 40% optional standard deduction (except for NRA-ETB)

INDIVIDUAL TAXPAYERS Schedular tax rates apply to all classes of

individuals, with the exception of non-resident
A. Natural Persons aliens not engaged in trade or business. Should
1. Resident Citizens NRANETB earn “other income,” such is subject to
2. Non-resident Citizens a 25% final tax.
3. Resident Aliens
4. Non-resident Aliens Rules on Situs
a. Engaged in Trade or Business 1. Only resident citizens are taxable on income
b. Not engaged in Trade or Business within and without.
2. Resident aliens, nonresident citizens and
B. Artificial Persons nonresident aliens are taxable on income
1. Taxable Estate within only.
2. Taxable Trust
Taxable Income
Categories of Income of Individuals
1. Compensation Income Pro-forma computation of income subject to
2. Income from Trade, Business or Practice of schedular tax rates:
Profession
3. Passive Income Compensation Income P xxx
4. Capital Gains Less: Personal Exemptions (xxx)
Health/Hosp. Insurance (xxx)
Classification of Taxes on Individuals Net Taxable Compensation P xxx
1. Normal (Schedular) graduated tax; Business Income xxx
2. Passive income tax; Less: Business expenses (xxx)
3. Capital gains Tax. Net Business Income xxx
Net Professional Income xxx
Tax Rates on NET Ordinary or Other Income Other Income:
(Schedular Rates) Capital gains not subject to FWT xxx
,Passive income w/o for RC xxx
Income But Tax Plus Of Total taxable income P xxx
over less Excess (Subject to schedular tax rates)
than Over
Net Business Income and Net Professional
10,000 5%
Income are computed as follows:
10,000 30,000 500 10% 10,000
30,000 70,000 2,500 15% 30,000 Gross Business / Professional Income P xxx
70,000 140,000 8,500 20% 70,000 Less: Itemized Deductions [OR]
140,000 250,000 22,500 25% 140,000 Optional Standard Deduction (xxx)
250,000 500,000 50,000 30% 250,000 Net Business / Professional Income P xxx
500,000 125,000 32% 500,000
 54 |TAXATION LAW REVIEWER
Passive Income
Passive income is an income earned from allowing
others to use one’s rights, or game of chance or
investment, which the TP merely waits for the
income to come in.
Rules:
1. This is subject to Final Tax.
2. Once subjected to Final tax, it is no longer
included in the taxable income subject to
normal (schedular) tax.
3. Deductions and exemptions do not apply to
items subject to final tax.
4. All passive income derived by a resident
citizen outside the Philippines are subject to
normal/schedular tax in the Philippines.
(Sec. 24A)
5. The share of a partner in a general business
partnership is to be treated as dividend
income, subject to Final Tax of 10%.
6. Prizes earned within amounting to P10,000
or less are subject to normal tax, while
winnings earned within are generally
subject to passive income tax of 20%.
7. Sweepstakes and lotto winnings in the
Philippines are tax-exempt.
(Refer to the above summary for the
applicable Tax Base and Tax Rate)
Examples of Income Subject to Final Tax:
a. Interest income from bank deposit
b. Royalties
c. Dividend received from domestic
corporation by individual or NRFC
d. Prizes amounting to more than
Php10,000.00
e. Winnings (except sweepstakes and lotto)
f. Partner’s share from the net income
after tax of business partnership, joint
account, joint venture or consortium
Passive Investment Income. An income subject to
final withholding tax.
Consequences:
 The withholding agent withholds the tax and
remits the same to the BIR.
 The recipient is not required to include the
income in his gross income. Neither is the
taxpayer required to include it in the taxable
income (CIR vs. PAL, 504 SCRA 90)
 Taxpayer is not required to file if his income
consists solely of income subject to final tax.
 The tax withheld constitutes final settlement
of the tax liability on the income.
Interest Income – amount of compensation paid
for the use of money or forbearance from such
use.
 Includes such interest arising from
indebtedness- business or non-business,
legal or illegal, usurious or not.
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
 Interest on government securities
(taxable effective January 1, 1998).
 Interest on saving deposit, time deposits
and deposit substitutes subject to 20%
final tax.
Dividend Income - corporate profit set aside,
declared and distributed by the director of a
corporation to be paid to stockholders on
demand or at a fixed time. Under the Tax Code,
any distribution made by a corporation to its
stockholders, whether in money or property out
of its earnings and profits accrued since 1 March
1913.
Kinds of Dividends:
1. Cash Dividend - paid in given sum of money
2. Property Dividend – one paid by corporation in
securities (not its own stock) or other property
3. Stock Dividend - one paid by a corporation
with its own stock. It represents transfer of
surplus to capital account. It may be of the
same kind or different from that on which it is
issued.
General Rule (as to stock dividends): Not
subject to income tax if it represents the
transfer surplus to capital account.
Exception: If it gives the shareholder an
interest different from that which his former
stockholdings represented:
a. Shares later redeemed for
consideration by the corporation
or otherwise conveyed by the
stockholder to the extent of such
consideration;
b. Recipient is other than the
shareholder;
c. A change in the shareholder’s
equity results by virtue of the
stock dividend issuance.
d. Distribution of treasury stocks.
e. Dividends declared in the guise of
treasury stock dividend to avoid
the effects of income taxation
(Commissioner vs. Manning, 66
SCRA 14)
f. Different classes of stock were
issued.
4. Liquidating Dividend - one resulting from
the distribution by a corporation of all its
property or assets in complete liquidation or
dissolution. Taxable income refers to the
excess of amount received over cost of the
share surrendered.

Giver Recipient Taxable
(tax rate) /
Exempt
Domestic Domestic/RFC Tax EXEMPT
Domestic RC, NRC, RA 10% (effective
taxable year
2000)
Domestic NRA-ETB 20%
Domestic NRA-NETB 25%
Domestic NRFC 15% Subject to
allowance for
tax credit
Royalty Income – it is the payment for the use and
exhaustion of property such as earnings from
copyrights, patents, trademarks, formulas and
natural resources under lease.
 Included in the gross income IF derived
from sources OUTSIDE the Philippines
because those from sources within are
subject to final withholding tax.
 If the recipient of the royalty is paid by
DC is either a NRA-NETB or NRFC, a
lower tax rate may be allowed under an
existing treaty.
Rental Income – amount or compensation paid for
the use or enjoyment of a thing or a right and
implies a fixed sum or property amounting to a
fixed sum paid at a stated time for the use of the
property.
Prizes and Winnings. These refer to the amount of
money in cash or in kind received by chance or
through luck and are generally taxable except
specifically mentioned under the “exclusions” from
the computation of gross income under Section 32
(B).
 Prizes derived from sources within not
exceeding Php 10,000 is included in the gross
income; if over Php 10,000, it is subject to final
tax on passive income.
 Winning from sources within is subject to final
tax on passive income EXCEPT PCSO and
lotto winnings that are exempt.
 Prizes and winnings from sources without is
included in the gross income.
Capital Gains Tax
These taxes are imposed on sales or exchanges of
properties not used in business.
(Refer to Dealings in Property section)
55
PERSONAL EXEMPTIONS
Personal exemptions are the arbitrary amounts
allowed by the law as a deduction from the gross
compensation income and/or net business income
and/or professional income as the case may be, for
personal, living or family expenses. These are
considered to be the equivalent of the minimum
subsistence.
Kinds of Personal Exemptions
1. Basic Personal Exemption (BPE)- deductible
allowance allowed to the individual TP
regardless of status.
2. Additional Personal Exemption (APE) –
deductible allowance in addition to the BPE
allowed for qualified dependent children of an
individual TP.
The new RA 9504 provides for BPE- P50,000 for
each individual taxpayer without classifying the
individual TPs into single, head of the family and
married, and APE – P25,000 for each qualified
dependent child (not exceeding four).
TPs Allowed for Personal Exemption
The following individual TPs with compensation
or business income in the Phils. are entitled to
personal exemption:
1. Citizens of the Phils., whether resident or
nonresident;
2. Resident aliens;
3. Estates and trusts;
4. NRA-ETB, subject to reciprocity.
 NRA-ETB can claim BPE if his country grants
personal exemption to Filipinos not residing
therein but who derives income in that
country (reciprocity). The exemption shall be
the lesser amount between that allowed in his
country and that allowed in the Philippines.
TPs not Allowed for Personal Exemption
1. NRA-ETB in the Phils. - not enjoying
reciprocity clause;
2. NRE-NETB in the Phils;
3. Corporations;
4. Partnerships.
TPs Entitled to APE
1. RC;
2. NRC;
3. RA, provided that the qualified
dependent children are living with him in
the Phils.
Requisites for APE
The dependent must be;
1. a TP”s child, whether legitimate, illegitimate
or legally adopted;
 56 |TAXATION LAW REVIEWER
2. chiefly dependent upon the TP for support;
3. living with the TP;
4. not married; not gainfully employed, and not
more than 21 years old. (Sec 35B)
Additional Personal Exemption (APE) - P25,000
for each qualified dependent child.
a. Limited to four (4) children only which
includes legitimate, illegitimate, or legally
adopted.
b. Husband shall claim the APE unless:
1. he waives his right to claim; or
2. he is disqualified; or
3. he has no income; or
4. he is a NRC or RA and his income is
derived purely from sources without.
c. In case of separated parents, the proper
claimant is the custodian of the children.
Premium Payments for Health/Hospitalization
Insurance (PPHHI)
These are the actual premium payments for
health and/or hospitalization insurance taken by
an individual TP for himself or for his family
allowed as deduction at an amount not exceeding
P2,400 per family or P200 a month whichever is
lower during the year provided that their family
total gross income does not exceed P250,000 for
the calendar year. (Sec 34M)
Exemption of Estates and Trusts is P20,000 (Sec.
62)
Tax Incentives Available to Senior Citizens
(RA 9257):
i. Individual income tax provided that their
annual taxable income does not exceed the
poverty level as determined by the NEDA for
the corresponding taxable year;
ii. Twenty percent (20%) discount on their
purchase of goods and services;
iii. From all establishments relative to the
utilization of services in hotels, inns,
restaurants, recreation centers;
iv. On admission fees to theaters, cinema,
concert halls, circuses, carnivals and other
places of culture, leisure and amusement for
their exclusive use and enjoyment;
v. On medical and dental services, professional
fees of attending doctors, diagnostic and
laboratory fees such as but not limited to x-
rays, computerized tomography scan and
blood tests, in all private hospitals and
medical facilities in accordance with rules and
regulations to be issued by the DOH, in
coordination with the Philippine Health
Insurance Corporation;
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
vi. In public railway, skyways and bus fare for
the exclusive use and enjoyment of the senior
citizen; and
vii. Exemption from the 12% VAT on their
purchases of goods and services.
NOTE: In 2009, the Supreme Court ruled that the
20% Senior Citizen discount may be claimed as a
special allowable deduction from gross income and
may no longer be claimed as a tax credit.
Under Article XIV of the Tax Treaty,
compensation income for services done in the
Philippines may be EXEMPT from income tax, if
the –
a) Recipient of income is present in the
Philippines for a period not exceeding 183
days in the aggregate during the calendar
period;
b) The remuneration is paid by or on behalf, of
an employer who is not a resident of the
Philippines; and
c) The remuneration is not borne by a
permanent establishment which the employer
has in the Philippines.
The following are also exempt under treaty:
a) Income of any kind to the extent required by
any treaty obligation binding the Philippine
Government (International Comity)
b) Salaries of officials of the United Nations
c) Salaries of consular officers (US citizens) in
the US Embassy (exempt from all kinds of
taxes)
Tax Credit
The tax withheld by source shall be applied as a
reduction of the tax liability of the TP in the
taxable year or quarter in which the income was
earned or received.
TPs Entitled to Tax Credit
1. Resident Citizens
2. Domestic Corporations, which include
business partner
3. Members of the professional partnerships
4. Beneficiaries of estates and trusts
TPs Not Entitled to Tax Credit
1. Nonresident Citizens,
2. Resident and nonresident Aliens
3. Resident and Nonresident Foreign
Corporations
Tax Credit for Taxes Paid to foreign Country
Taxes paid by an individual to a foreign country
shall be subject to the following rules:
a. An alien individual shall not be allowed
the tax credits against the tax for the
taxes paid to foreign countries. (Sec. 24C
3b). Reason: It is because he shall be taxed
on income derived from within the
Philippines only.

b. At the option of the TP, the income tax paid
by RC to any foreign country may be
treated as an item of deduction or tax
credit.
c. The total amount of the credit shall not
exceed the same proportion of the tax
against which such credit is taken, which
the TP’s taxable income from sources
without the Philippines bears to his entire
taxable income for the same taxable year.
(Sec. 34 C 4b).
Limitations on Tax Credit Rules:
1. One foreign country only
The tax credit allowed is whichever is
lower between:
a. Income tax paid to the foreign
country, or
b. Taxable income from
foreign country X Phil.
Taxable income from income tax
all sources
2. Two or More Foreign Countries
The same formula is used as that of one
foreign country except that the
allowable tax credit will be the lower of
the following:
a. actual tax paid to foreign country;
b. Limit on tax credit computed
using individual taxable income
from foreign country (as
numerator); or
c. Limit on tax credit computed
using total taxable income from
foreign country (as numerator)
Individual Income Tax Returns
The following individual TPs are required to file
ITR that should be filed in triplicate:
1. RC on his income from all sources.
2. NRC on his income within the Phils.
3. RA on his income within.
4. NRA-ETB engaged in trade or business or
profession in the Phils.
Individual TPs Not Required to file ITR
1. If gross income does not exceed his total
BPE and APE
2. Purely compensation income earner
derived from within and the pertinent
income tax has been correctly withheld.
3. Sole income subjected to FWT.
4. If exempt from income tax.
Substituted Filing of ITR
57
Individual TPs receiving purely compensation
income, regardless of amount, from only one
employer in the Philippines for the calendar year
whose income tax has been withheld correctly by
the said employer shall not be required to file BIR
Form 1700 if the tax due per computation equals
tax withheld.
In lieu of BIR Form 1700, the Annual Information
Return of Income Taxes Withheld on
Compensation and FWTs filed by their employers,
duly stamped “received” by BIR, shall be
tantamount to the substituted filing of ITR by said
employees.
TAXATION OF TAXABLE ESTATES AND
TRUSTS
The taxable income of the estate/trust shall be
determined in the same manner and basis as in
the case of individual TPs. (Sec. 60)
Rules for Taxable Estates
1. An estate is taxable only if it is under judicial
settlement.
2. It is taxed based on net income at the
graduated tax rates applicable to
individuals.
3. Any income to be distributed currently to the
heirs is allowed as deduction (in addition to
those allowed under Sec. 34) from gross
income of the estate (Sec. 61).
4. The amount of income allowed as a deduction
shall be included in computing the taxable
income of the heir.
5. Personal exemption allowed to the estate is
P20,000 (Sec. 62)
If the heirs contribute to the estate money,
property, or industry with intention to divide the
profits between/among them, an unregistered
partnership is created and the estate becomes
liable for the payment of corporate income tax
(Evangelista vs. Collector, G.R. No. L-9996,
October 15, 1957; Oña vs. Commissioner, G.R. No.
L-19342, October 15, 1957)
Estates not under Judicial Settlement
An estate, the settlement of which is not the object
of judicial testamentary or intestate proceedings
is not a taxable entity. The income there of is
taxable directly to the heir or beneficiary. These
are subject to income tax as co-ownership.
The tax treatment of co-ownership is similar to
general professional partnership. Hence, the tax
liability on income is levied directly on the co-
owners. The co-ownership income and deductions
are simply apportioned to the co-owners to the
extent of their respective interests therein,
regardless of whether such income is distributed
or not.
 58 |TAXATION LAW REVIEWER

 An unregistered partnership is created

TRUST is a legal arrangement whereby the owner when the heirs invested the common
of the property (trustor) transfers ownership to a properties and income and placed them
person (trustee) who is to hold and control the under a single management (Oña vs.
property belonging to the owner’s instructions, for Commissioner 45 SCRA 74).
the benefit of a designated person(s)  Subject to income tax as a corporation.
(beneficiaries).

Rules for Taxable Trusts INCOME TAX OF CORPORATIONS

1. The trust acquires tax personality if it is
an irrevocable trust amounting to a Taxes on Corporate Income (Quick View)
complete divestment of the grantor of
control over corpus and income.
2. All current distributions are allowed as
Kinds Sources Tax base Tax rate
deduction from gross income of the trust DC Within Taxable NCIT-30%,
but to be reported as income of and income, or or
beneficiary (One-layer-taxation regime). Without Gross MCIT –
3. Personal exemption is P20,000 income 2%, if
4. In case of two or more trusts of the same applicable
grantor and the same beneficiaries, the RFC Within Taxable NCIT-30%,
tax is computed based on the consolidated income, or or
income and each trustee is liable to said Gross MCIT –
tax in an amount which the taxable income 2%, if
income of the trust administered by him applicable
bears to the consolidated taxable income NRFC Within Gross 30%
[Sec. 60(c)(2)]. income
5. Employee’s Trust is tax exempt. Any
amount distributed to the employee is
taxable to him upon distribution but only Special Domestic Corporations
for that portion which exceeds the
amount contributed by him. Classifications Applicable
6. The net taxable income shall be taxed by Tax
using the graduated schedular rate based 1. Proprietary educational 10% of net
on Sec. 24A. institutions (except those taxable
whose gross income from income
CO-OWNERSHIP unrelated sources exceeds
50% of their total GI)
It exists whenever the ownership of an undivided
thing or right belongs to different persons. 2. Nonprofit hospitals 10% of net
taxable
Not considered as a separate taxable entity or a income
corporation as defined in Section 22 (B) of the 3. GOCCs NCIT
NIRC. 4. Exempt government Tax exempt
organizations
For income tax purposes, the individual co-owners (GSIS, SSS, PHIS, PCSO)
in a co-ownership report their share of the income
of their property owned in common by them in
their individual tax returns for the year. Special Resident Foreign Corporations

Co-ownership Due To Death of a Decedent Classifications Applicable Tax

for Income
1. Before partition of property W/in
General Rule: Not subject to income tax if 1. International carriers 2 ½ % of
owners are limited to the preservation of the Philippine gross
property and the collection of income billings
therefrom.
2. Offshore banking units 10% of GI
 Each co-owner is taxed individually on his
3. Branch remittances 15% of
distributive share.
remittance
 Before the partition and distribution of the
4. Regional area Tax exempt
estate of the deceased, all the income
headquarters
thereof belongs in common to all heirs.
5. Regional operating HQ 10% of taxable
income
2. After partition of property

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012

 59

Special Nonresident Foreign Corporations

Classifications Applicable
tax (income 4. Net capital
gains on sale or 30% Not Not
within)
exchange or taxable taxable
Cinematographic Film
disposition of land
owner, lessor/distributor 25% of GI
and/or, buildings
outside the Phils.
Lessor of machinery,
lands or buildings FMV,
equipment, aircraft and 7 ½ % of GI
located in the whichever
others
Phils. is higher
Lessor of vessels chartered 4 ½ % of GI
by Philippine nationals

Tax Rules on Dividend Income

Passive Income Tax
Giver Recipient Tax
Passive Income Domesti Nonresiden DC RC
Within c t Foreign NRC 10% Final Tax
RA
and DC NRA-ETB 20% Final Tax
Resident DC NRA-NETB 25% Final Tax
Foreign DC DC Tax Exempt
1. Interest from DC RFC Tax Exempt
depository bank 7.5% Tax exempt DC NRFC 15% Final tax
under the FCDS FC Individual or
2. Royalties, Corporate TP
yield on 20% NCIT
monetary
substitutes, Classification of Corporate TPs
trust funds 1. Domestic Corporation (DC)
and similar 2. Foreign Corporation
arrangements a. Resident Foreign
. b. Nonresident Foreign
3. Interest on NCIT
currency bank 20% Income Taxes of Corporations
deposit 1. Normal Corporate Income Tax (NCIT) =
30% based on net taxable income
2. Minimum Corporate Income Tax = 2% of
Capital Gains Tax Gross Income
3. Gross Income Tax (GIT) – optional, if
requirements are met.
Domestic RFC NRFC
4. Capital Gains Tax – on sale of real property
1. Capital gains or on sale of shares of stock
on sale of shares 5. Final Tax on Passive Income
of stock not
traded in the local Domestic Corporation
stock exchange:
Net capital Gain Tax Payable:
Not over 1. Regular Tax or NORMAL CORPORATE
P100,000 INCOME TAX RATE = 30%
Excess of 5% 5% 5%
P100,000 Tax formula for normal tax:
10% 10% 10% Gross Income (ALL income items
EXCEPT passive income subject to final
2. Percentage tax tax and capital gain with capital gain tax)
on sale of shares ½ of 1% of ½ of ½ of Less:
of stock traded in selling 1% of 1% of Allowable deductions for expenses and
the local stock price selling selling losses
exchange. price price
Taxable Income subject to normal tax
3. Capital gains
on sale or 6% of Same 30%
2. MINIMUM CORPORATE INCOME TAX
exchange or selling as DC final
(MCIT) – imposed on domestic and resident
disposition of price or tax
foreign corporations
 60 |TAXATION LAW REVIEWER
 If they have been in their fourth year of
operation, and
 Incurred a net loss or zero taxable
income, or a normal income tax that is
lesser than minimum income tax. Section
27[A].
Tax Rate: 2% of gross income or taxable base
pertinent to a trading/merchandising concern
or a service entity
Tax Base: GROSS INCOME
NOTE: Gross income excludes passive income
subject to final tax. Other income and
extraordinary income are included since R.R.
9-98 provides that gross sales include sales
contributory to income taxable under the
regular corporate tax.
Rationale behind MCIT: Congress intend to
put a stop to the practice of corporations
which, while having large turnovers, report
minimal or negative net income resulting in
minimal or zero income taxes year in and year
out, through under-declaration of income or
over-deduction of expenses otherwise called
tax shelters.
Normal Corporate Income Tax (NCIT) vs.
Minimum Corporate Income Tax (MCIT).
Under the NCIT, the taxable income of a
corporation during each taxable year is multiplied
with the applicable rate which is currently 30%.
The taxable income arrived at by deducting all the
applicable allowable deductions under the NIRC
from the gross sales or receipts (less returns,
discounts and allowances).
Under the MCIT, tax is imposed on a corporation
at the rate of 2% based on gross income. The gross
income is defined as gross sales or receipts less
returns, discounts and allowances and cost of
goods sold. Cost of goods sold shall include all
business expenses directly incurred to produce the
merchandise to bring them to their present
location and use. Thus, there are limited
deductions available.
RELIEF from MCIT (ProForRev)
The Secretary of Finance is authorized to suspend
the imposition of the MCIT on any corporation
which suffers losses because of:
a. prolonged labor dispute – losses arising from
a strike staged by the employees which lasted
for more than six (6) months within a taxable
period and which has caused the temporary
shutdown of business operations;
b. force majeure - “acts of God”, such as
lightning, earthquake, storm, flood and the
like and also includes armed conflicts; or
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
c. legitimate business reverses – includes
substantial losses sustained due to fire,
robbery, theft or embezzlement, for other
economic reasons as determined by the
Secretary of Finance
LIMITATIONS
(Corporations exempt from the MCIT):
a. The MCIT shall apply only to domestic and
resident foreign corporations subject to the
normal corporate income tax (income tax
rates under Sec 27[A] of the CTRP).
b. In the case of a domestic corporation whose
operations or activities are partly covered by
the regular income tax system and partly
covered under a special income tax system,
the MCIT shall apply on operations covered
by the regular corporate income tax system.
c. In computing for the MCIT due from a
resident foreign corporation, only the gross
income from sources within the Philippines
shall be considered for such purposes.
The imposition of MCIT is not violative of due
process for the following reasons:
1. MCIT is imposed on gross income and not
capital. Thus, it is not arbitrary or confiscatory.
2. It is not an additional tax imposition but is
imposed in lieu of normal net income tax and only
if said tax is suspiciously low.
3. There is no legal objection to a broader tax base
or taxable income resulting from the elimination
of all deductible items and, at the same time,
reduction of the applicable tax rate. Inasmuch as
deductions are a matter of legislative grace,
Congress has the power to condition, limit or deny
deductions from gross income in order to arrive at
the net that it chooses to tax. (CREBA vs. The
Hon. Executive Secretary Alberto Romulo, et al.,
G.R. No. 106756, March 9, 2010)
MCIT is imposed beginning on the fourth
taxable year immediately following the year
in which such corporation commenced its
business. The taxable year in which the
business operations commenced shall be the
year when the corporation registers with the
BIR.
Carry Forward of the Excess Minimum Tax
 Any excess of MCIT over the normal income
tax can be carried forward on an annual basis.
 The excess can be credited against the normal
income tax due in the next three (3)
immediately succeeding taxable years.
 Any amount of the excess MCIT which cannot
be credited against the normal income tax due
in the next 3-year period shall be forfeited.

For purposes of applying the minimum
corporate income tax, the term “gross income”
means gross sales less sales returns,
discounts and allowances and cost of goods
sold.
“Cost of goods sold” shall include all business
expenses directly incurred to produce the
merchandise to bring them to their present
location and use.
 Trading or Merchandising Concern –
“cost of goods sold” shall include the
invoice of cost of the goods sold, plus
import duties, freight in transporting the
goods to the place where the goods are
actually sold including insurance while
the goods are in transit.
 Manufacturing Concern – “cost of goods
manufactured and sold” shall include all
costs of production of finished goods, such
as raw materials used, direct labor and
manufacturing overhead, freight cost,
insurance premiums and other costs
incurred to bring the raw materials to the
factory or warehouse.
 Sale of Service – “gross income” means
gross receipts less sales returns,
allowances, discounts and cost of
services. ‘Cost of services’ shall mean all
direct costs and expenses necessarily
incurred to provide the services required
by the customers and clients including
(A) salaries and employee benefits of
personnel, consultants and specialist
directly rendering the service and (B) cost
of facilities directly utilized in providing
the service such as depreciation or rental
of equipment used and cost of supplies:
Provided, however, That in the case of
banks, ‘cost of services’ shall include
interest expense.
Allowable Deductions
1. Itemized Deductions (see discussion on
Itemized Deductions)
2. Optional Standard Deduction (see discussion
on Optimized Standard Deduction)
Gross Income Tax (GIT) (Sec. 27)
The President, upon the recommendation of the
Secretary of Finance, may effective January 1,
2000, allow corporations the option to be taxed at
fifteen percent (15%) of gross income as defined
therein, after the following conditions have been
satisfied:
1. A tax effort ratio of twenty percent (20%) of
Gross National Product (GNP);
2. A ratio of forty percent (40%) of income tax
collection to total tax revenues;
3. A VAT tax effort of four percent (4%) of GNP;
and
61
4. A 0.9 percent (0.9%) ratio of the Consolidated
Public Sector Financial Position (CPSFP)
to GNP.
The option to be taxed based on gross income shall
be available only to firms whose ratio of cost of
sales to gross sales or receipts from all sources
does not exceed fifty-five percent (55%).
The election of the gross income tax option by the
corporation shall be irrevocable for three (3)
consecutive taxable years during which the
corporation is qualified under the scheme.
TAX ON PASSIVE INCOME & DEALINGS IN
PROPERTY
Passive Income Subject To Final Tax
a. Interest Income – on any currency bank
deposit, yield or any other monetary benefit
from deposit substitutes, trust funds and
similar arrangements
Final Rate:
20%
b. Capital gains realized from the sale of
shares of stock not traded in the stock
exchange (Tax treatment is the same as
that of individuals)
Final Rate:
Not over Php100,000 - 5%
Amount in excess of Php100,000 – 10%
c. Under The Expanded Foreign Currency
Deposit System (EFCDS)
Final Rate:
7.5%
d. Dividends received from another domestic
corporation (Intercorporate Dividend)
Final Rate:
Exempt
e. Capital gains realized from the sale,
exchange, or disposition of lands and/or
buildings (not actually used in the business
corporation and are treated as capital
assets)
Tax base: Gross selling Price or FMV
whichever is higher, of such land and/or
buildings
Final Rate:
6%
f. Royalties of any kind derived from sources
within the Philippines
Final Rate:
20 %
a. Taxation on Capital Gains (see
further discussion on Taxation on
Capital Gains of Individuals; tax
treatment is the same as that of
individuals)
 62 |TAXATION LAW REVIEWER
1. Capital gains realized from the sale
of shares of stock traded in the stock
exchange
2. Income from sale of property
situated in the Philippines
3. Income from the sale, exchange, or
other disposition of other capital
assets
b. Tax on proprietary educational
institutions.
TAX EXEMPT EXCHANGES
(Sec 40 C2)
No gain or loss shall be recognized if in pursuance
of a plan of merger or consolidation –
(a) A corporation, which is a party to a merger or
consolidation, exchanges property solely for stock
in a corporation, which is a party to the merger or
consolidation; or
(b) A shareholder exchanges stock in a
corporation, which is a party to the merger or
consolidation, solely for the stock of another
corporation also a party to the merger or
consolidation; or
(c) A security holder of a corporation, which is a
party to the merger or consolidation, exchanges
his securities in such corporation, solely for stock
or securities in such corporation, a party to the
merger or consolidation.
No gain or loss shall also be recognized if property
is transferred to a corporation by a person in
exchange for stock or unit of participation in such
a corporation of which as a result of such exchange
said person, alone or together with others, not
exceeding four (4) persons, gains control of said
corporation: Provided, That stocks issued for
services shall not be considered as issued in return
for property.
(Refer to discussion under DEALINGS IN
PROPERTY section.)
TAXATION ON RESIDENT FOREIGN
CORPORATION
Resident Foreign Corporations are those created
and organized under a foreign law and engaged in
business in the Philippines. These are taxed
ONLY on income realized WITHIN THE
PHILIPPINES.
NOTE: Whether or not it is licensed to do business
in the Philippines, it is taxed on its income
realized within the Philippines. Even if all the
stockholders and incorporators are Filipinos, it
will still be classified as a foreign corporation if the
entity is organized under a foreign law (outside) of
the country.
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
MINIMUM CORPORATE INCOME TAX (MCIT)
OR GROSS INCOME TAX (GIT)
 that of domestic corporations is equally
applicable to resident foreign corporations,
both as to concepts and computations, except
that RFCs are taxed only on income from
sources within the Philippines.
TAX ON CERTAIN INCOME
1. Interest Income – on any currency bank
deposit, yield or any other monetary benefit
from deposit substitutes, trust funds and
similar arrangements and royalties
Final Rate:
20%
2. Income derived under the expanded foreign
currency deposit system
Final Rate:
7.5%
3. Capital gains from the sale of shares of stock
not traded in the stock exchange –
5% on the first P100,000 net capital gain
10% in excess of the P100,000
4. Intercorporate Dividends
Exempt
5. Capital gains realized from the sale, exchange,
or disposition of lands and/or buildings
6% of the gross selling price or FMV
whichever is higher
6. Income on time deposits that is pre-
terminated before the fifth year:
4 years to less than 5 years – 5%
3 years to less than 4 years – 12%
If less than 3 years – 20%
International Carriers
Tax Rate and Base – 2.5% on Gross Philippine
Billings (GPB).
GPB refers to the amount of:
 gross revenue derived from carriage of
persons, excess baggage, cargo and mail
originating from the Philippines in a
continuous and uninterrupted flight,
irrespective of the place of sale or issue and
the place of payment of the ticket or passage
document
 gross revenue from tickets revalidated,
exchanged and/or indorsed to another
international airline if the passenger boards a
plane in a port or point in the Philippines
 for flights which originate from the
Philippines, but transshipment of passenger
takes place at any port outside the
Philippines on another airline, the gross
revenue consisting of only the aliquot portion
of the cost of the ticket corresponding to the

leg flown from the Philippines to the point of
transshipment [R.R. 15-2002]
 In the case of International Shipping, GPB
means: gross revenue whether for passenger,
cargo or mail originating from the Philippines
up to final destination, regardless of the place
of sale or payments of the passage or freight
documents.
If an international air carrier maintains flights
to and from the Philippines, it shall be taxed at
the rate of 2½% of its Gross Philippine Billings,
while international air carriers that do not have
flights to and from the Philippines but
nonetheless earn income from other activities in
the country will be taxed at the normal rate of
such income. (South African Airways vs.
Commissioner of Internal Revenue, G.R. No.
180356, February 16, 2010)
NOTE: A foreign airline company selling tickets
in the Philippines through their local agents
shall be considered a foreign corporation engaged
in trade or business in the country. The absence
of flight operations within the Philippines cannot
alter the fact that the income received was
derived from activities within the Philippines.
The test of taxability is the source, and the source
is that activity which produced the income.
Offshore Banking Units authorized by the Bangko
Sentral ng Pilipinas (BSP) [Sec. 28 (A) (4) as
amended by R.A. 9294 (2004)], supplemented by
R.A. 9337]
Covers ONLY income derived by offshore banking
units from foreign currency transactions with:
 non-residents,
 other offshore banking units
 local commercial banks including branches
of foreign banks that may be authorized by
the Bangko Sentral ng Pilipinas (BSP) to
transact business with offshore banking
units
Tax Rate: Exempt from all taxes, except net
income from such transactions as may be specified
by the Secretary of Finance, upon
recommendation by the Monetary Board to be
subject to the regular income tax payable by banks
Exception: Interest income derived from foreign
currency loans granted to residents other than
offshore banking units or local commercial banks,
including local branches of foreign banks that may
be authorized by the BSP to transact business
with offshore banking units, shall be subject only
to a final tax at the rate of 10%.
Branch Profit Remittance Tax
(Sec. 28[A][5])
 Taxable transaction – any profit remitted by
a branch to its head office
63
 Tax Rate and Base – 15% based on the total
profits applied or earmarked for remittance
without any deduction for the tax component
 Non-taxable activities – activities which are
registered with the Philippine Economic Zone
Authority
 Income NOT TREATED AS BRANCH
PROFITS unless effectively connected with
the conduct of trade or business in the
Philippines:
i. interests, dividends, rents, royalties,
including remuneration for technical
services
ii. salaries, wages premiums, annuities,
emoluments
iii. other fixed or determinable annual,
periodic or casual gains, profits, income
iv. capital gains received during each
taxable year from all sources within the
Philippines
 The branch profit remittance tax is imposed
whether the head office of the foreign
corporation is located in a tax treaty country,
in a tax haven or other non-treaty country.
 The branch profit remittance tax is imposed
only on the profits remitted by a Philippine
branch to the head office of a foreign
corporation. Should the branch of a domestic
corporation remit profits to its head office, the
transaction is not subject to the branch profit
remittance tax.
Regional or Area Headquarters and Regional
Operating Headquarters of Multinational
Companies
 Regional or area headquarters - not subject
to income tax
 Regional operating headquarters - 10% of
their taxable income
TAXATION ON
NON-RESIDENT CORPORATIONS
These are corporations created and organized
under a foreign law, not engaged in business in the
Philippines. It has no branch or office here but
derives fixed or determinate income from sources
WITHIN THE PHILIPPINES.
Tax on Certain Income
1. Interest on foreign loans
Final withholding tax of 20%
2. Intercorporate Dividends
15% subject to the Tax Sparing Rule
3. Capital gains from sale of shares of stock not
traded in the stock exchange
5% on the first P100,000 net capital gain
10% in excess of the P100,000
 64 |TAXATION LAW REVIEWER
SPECIAL TYPES OF NON-RESIDENT
FOREIGN CORPORATIONS
1. Non-resident cinematographic film owners,
lessors or distributors - 25% of gross income
from all sources within the Philippines
2. Non-resident Owners or Lessors of Vessels
Chartered by Philippine Nationals - 4.5% of
gross rentals, lease or charter fees from leases
or charters to Filipino citizens or corporations,
as approved by the Maritime Authority
3. Non-resident Owners or Lessors of Aircraft,
Machineries and Other Equipment - 7.5% of
gross rentals or fees.
IMPROPERLY ACCUMULATED
EARNINGS TAX
(IAET)
Sec. 29, as implemented by R.R. 2-2001 which
prescribes rules governing the imposition of IAET]
These are profits of a corporation that are
permitted to accumulate instead of being
distributed by a corporation to its shareholders for
the purpose of avoiding the income tax with
respect to its shareholders or the shareholders of
another corporation.
Rate: 10% of the Improperly Accumulated Taxable
Income (in addition to other taxes)
Taxable Income
Adjusted by: Income exempt from tax
Income excluded from gross
income
Income subject to final tax
Amount of NOLCO deducted
Adjusted Taxable Income
Less: Dividends actually or
constructively paid
Income tax paid for the taxable
year
Improperly Accumulated Taxable Income
X Tax Rate (10%)
Improperly Accumulated Earnings Tax
 For corporations using the calendar basis the
accumulated earnings tax shall not apply on
IAE as of Dec. 31, 1997.
 For fiscal year basis, the tax shall not apply to
the 12-month period of fiscal year 1997-1998.
 IAE as of the end of a calendar or fiscal year
period on or after Dec. 31, 1998 shall be subject to
the 10% tax on such IAE
WHO ARE COVERED
General Rule: The IAE tax shall apply to every
corporation formed or availed for the purpose of
avoiding the income tax with respect to its
shareholders or the shareholders of any other
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
corporation, by permitting earnings and profits to
accumulate instead of being divided or
distributed. Only domestic and closely-held
corporations are liable for IAET.
Exception: The said tax shall not apply to:
(BIG-JEP2)
a. Banks and other non-bank financial
intermediaries;
b. Insurance companies;
c. Publicly-held corporations;
d. Taxable Partnerships;
e. General professional partnerships;
f. Non-taxable Joint Ventures; and
g. Enterprise duly registered with the
Philippine Economic Zone Authority (PEZA)
under R.A. 7916, and enterprises registered
pursuant to the Bases Conversion and
Development Act of 1992 under R.A. 7227, as
well as other enterprise duly registered under
special Economic zones declared by law which
enjoy payment of special tax rate on their
registered operations or activities in lieu of
other taxes, national or local. (RR 02-2001)
Evidence of Purpose to Avoid Income Tax
The fact that any corporation is a mere holding
company or investment company shall be prima
facie evidence of a purpose to avoid the tax upon
its shareholders or members
The fact that the earnings or profits of a
corporation are permitted to accumulate beyond
the reasonable needs of the business shall be
determinative of the purpose to avoid the tax upon
its shareholders or members unless the
corporation, by the clear preponderance of
evidence, shall prove the contrary.
Improperly Accumulated Taxable Income
Taxable income adjusted by:
a. Income exempt from tax;
b. Income excluded from gross income;
c. Income subject to final tax; and
d. The amount of net operating loss carry-over
deducted;
And reduced by the sum of:
a. Dividends actually or constructively paid; and
b. Income tax paid for the taxable year.
“Reasonable needs of the business”
 To determine the “reasonable needs” of the
business in order to justify an accumulation of
earnings, the courts of the United states have
invented the so called “Immediacy Test”
which construed the words “reasonable
needs” to mean the immediate needs of the
business, and it was generally held that if

corporation did not prove an immediate need
for the accumulation of the earnings and
profits, the accumulation was not for the
reasonable needs of the business and the
penalty apply (Manila Wine Merchants, Inc.
vs. CIR, 127 SCRA 483).
 American cases likewise hold that investment
of the earnings and profits of the corporation
in stock or securities of an unrelated business
usually indicates an accumulation beyond the
reasonable needs of the business (Manila
Wine Merchants, Inc. vs. CIR, 127 SCRA
483).
 “In determining whether accumulations or
earnings or profits in a particular year are
within the reasonable needs of a corporation,
it is necessary to take into account prior
accumulations, since accumulations prior to
the year involved may have been sufficient to
cover the business needs and additional
accumulations during the year involved
would not reasonably be necessary (Basilan
Estates, Inc vs. CIR, 21 SCRA 17).
 Includes the reasonably anticipated needs of
the business; such as:
a. For working capital requirement;
b. Reserve for future expansion;
c. Reserve for employees’ retirement benefit;
d. Investment in affiliates’ customers’
business and other related enterprise; and
earnings retained for sinking fund.
ABC Corp., a domestic corporation is 100% owned
by XYZ Co., also a domestic corporation. For the
taxable year 2000, the unrestricted retained
earnings of the first corporation exceeded 100% of
its paid-in capital. Despite this, it failed to declare
dividends in favor of XYZ Co. The Commissioner
assessed an improperly accumulated earnings tax
against ABC Corp. The latter contended that as
the intention of the law in imposing the IAET is to
force a corporation to declare dividends, so that
the individual stockholders receiving them may be
taxed on the income so received, it cannot be
deemed to have violated the law, considering that
intercorporate dividends are not taxable.
Rule on the validity of this argument.
No, ABC Corp’s contention is untenable. The
improperly accumulated earnings tax is being
imposed in the nature of a penalty to the
corporation for the improper accumulation of its
earnings, and as a form of deterrent to the
avoidance of tax upon shareholders who are
supposed to pay dividends tax on the earnings
distributed to them by the corporation. When
corporations do not declare dividends, income
taxes are not paid on the undeclared dividends
received by the shareholders.
While it is true that intercorporate dividends are
not taxable, nonetheless, the evil sought to be
65
avoided by the legislature shall be indirectly
violated since the dividend that should have been
received from the first corporation and should
have been included as part of the income of the
second corporation is withheld. As such, the
second corporation cannot declare to its
stockholders the dividend income that should
have been received from the first corporation.
EXEMPTION FROM
TAX ON CORPORATIONS
(Section 30, NIRC)
1. Labor, agricultural and horticultural
organization not organized for profit
Requisites:
a. Have no income inuring to the benefit of
any member;
b. Educational or instructive in character;
and
c. For the betterment, improvement of their
products and development of higher
degree of efficiency
2. Mutual savings bank and cooperative bank
Requisites:
a. Has no capital stock represented by
shares; and
b. Whose earnings less only the expenses of
operation are distributable wholly among
the depositors
3. Beneficiary society is exempt from tax only if
operated for the exclusive benefit of the
members such as fraternal organization
operating under the lodge system
4. Cemetery Company
Requisites:
a. If it is owned by and operated exclusively
for the benefit of its lot owners; and
b. If it is not operated for profit
5. Religious, charitable, scientific, athletic or
cultural corporation, or corporation for the
rehabilitation of veterans
Requisites:
a. It must be non-stock and organized and
operated for one or more of the specified
purposes; and
b. No part of its net income or assets shall
belong to or inure to the benefit of any
member
6. Business League
7. Civic League – those not organized for profit
but operated exclusively for purposes
beneficial to the community; entitled to
exemption compromise
 66 |TAXATION LAW REVIEWER
8. A non-stock and non-profit educational
institution. [Educational corporations may
include associations whose sole purpose is the
instruction of the public but associations
formed to disseminate controversial or
partisan propaganda are not educational
within the meaning of the law.]
9. Government educational institution
10. Mutual Insurance Companies and like
organizations [The income of the company
must be derived solely from assessments, dues,
and fees collected from members.]
11. Cooperative associations acting as sales agents
for farmers or others [It must be established
that for their own account they have no net
income.]
TAXATION OF PARTNERSHIPS AND
GENERAL PROFESSIONAL
PARTNERSHIPS
General Rule: Partnerships, no matter how
created, are subject to corporate income tax.
General co-partnerships (GCPs) - the partnership
itself is subject to corporate taxation. The
individual partners are considered stockholders
and, therefore, profits distributed to them by the
partnership are taxable as dividends.
Exception:
General Professional Partnerships (GPPs) as such
are not subject to income tax. GPP means:
1. a partnership formed by persons for the sole
purpose of exercising their common profession;
and
2. no part of the income of which is derived from
engaging in any trade or business [Sec. 22 (B),
NIRC]
 GPPs, however, are required to file returns of
their income for the purpose of furnishing
information as to the share in the net income of
the partnership which the partners shall
include in their individual returns.
 Members of the GPP are liable for income tax
only in their separate and individual capacity.
Each partner shall report as gross income his
distributive share, actually or constructively
received, in the net income of the partnership.
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
FRINGE BENEFIT TAX (FBT)
(Sec. 33 B, NIRC)
Fringe Benefit Tax- It is a monetary burden
imposed by the sovereignty on any good, service,
or other benefits furnished or granted by an
employer, in any cash or in kind, in addition to
basic salaries, to an individual employee other
than a rank and file employee.
The employer (individual, professional
partnership, or corporation, whether taxable or
not), or the government and it’s instrumentalities
are liable to remit the fringe benefit tax to the BIR
once fringe benefit is given to a managerial or
supervisory employee.
The fringe benefit tax is a final tax on the
employee’s income to be withheld by the employer
(Sec. 33(A); Sec 57(A), NIRC). The withholding
and remittance of FBT shall be made on a
quarterly basis.
Fringe Benefits - means any good, service, or
other benefit furnished or granted by an
employer, in cash or in kind, in addition to basic
salaries, to an individual employee (except rank
and file employees) such as, but not limited to the
following:
(HEV-HIM-HEEL)
1. Housing
2. Expense Account
3. Vehicle of any kind
4. Household personnel, such as maid, driver
and others
5. Interest on loan at less than market rate
to the extent of the difference between the
market rate and actual rate granted.
6. Membership fees, dues and other expenses
borne by the employer for the employee in
social and athletic clubs and similar
organizations
7. Expenses for foreign travel
8. Holiday and vacation expenses
9. Educational assistance to the employee or
his dependents;and
10. Life or health insurance and other non-life
insurance premiums or similar amounts
on excess of what the law allows.
The fringe benefit covered by Sec 33 refers to those
enjoyed by managerial and supervisory
employees.
Managerial employee - one who is vested with the
powers or prerogatives to lay down and execute
management policies and/or to hire, transfer,
suspend, lay-off, recall, discharge, assign or
discipline employees.
Supervisory employees - those who, in the interest
of the employer, effectively recommend such
managerial actions if the exercise of such
 67

authority is not merely routinary or clerical in

nature but requires the use of independent GROSSED UP
YEAR RATE
judgment. DIVISOR
1998 66% 34% FWT
All employees not falling within any of the above 1999 67% 33% FWT
definitions are considered rank-and-file 2000 68% 32% FWT
employees. onwards

Classification of Fringe Benefits SPECIAL TREATMENT OF FRINGE

For taxation purpose, fringe benefits maybe
classified as follows:
1. Fringe benefits to rank and file employees are
taxable as compensation income subject to
normal tax rate , except
a. De minimis benefits, and
b. Benefits provided for the convenience of
the employer;
2. Fringe benefit to managerial employees are
taxable with final fringe benefit tax of 32%,
except
a. De minimis benefits, and
b. Benefits provided for the
convenience of the employer.
3. Allowances which are fixed in amounts and
are regularly received by the employee as part
of his monthly compensation income shall not
be treated as taxable fringe benefit but as
compensation income.
BENEIFTS; Deductibility to the Taxable Income
of the Employer
General Rule: The amount of taxable fringe
benefit and the fringe benefits tax shall constitute
allowable deductions from gross income of the
employer.
Exception: If the basis for computation of the fringe
benefits tax is the depreciation value, the zonal value
or the fair market value, only the actual fringe
benefits tax paid shall constitute a deductible
expense for the employer. The value of the fringe
benefit shall not be deductible and shall be presumed
to have been tacked on or actually claimed as
depreciation expense by the employer. Provided,
however, that if the aforesaid zonal value or fair
market value of the said property is greater than its
cost subject to depreciation, the excess amount shall
be allowed as a deduction from the employer's gross
income as fringe benefit expense. (Sec. 2.33[D], Rev.
Reg. No. 3-98)

Person liable: The EMPLOYER (as a withholding TAXABLE FRINGE BENEFITS:

agent), whether individual, professional
partnership or a corporation, regardless of 1. Housing
whether the corporation is taxable or not, or the General Rule: the value to the employee of
government and its instrumentalities quarters and meals given by the employer
shall be subject to tax.
Tax rate: 32% (from January 1, 2000 onwards) of the
Grossed up Monetary Value (GMV) of fringe benefits. Exception: if living quarter/meals are
furnished to an employee for the convenience
In the case of aliens, the tax rates to be applied on of the employer.
fringe benefit shall be as follows:
1. NRA-NEBT 25% 2. Expense Account
2. Aliens employed by regional HO 15% General Rule: fixed and variable
3. Aliens employed by OBU 15% transportation, representation and other
4. Aliens employed by Petroleum Service allowances are taxable.
5. Contractors and Subcontractors
Exception: if incurred or reasonably expected
“GMV” of the fringe benefit represents: to be incurred by employee in the performance
1. the whole amount of income realized by the of his duties, subject to the following
employee which includes the net amount of conditions:
money or net monetary value of property a. ordinary and necessary in the pursuit of
which has been received; plus employer’s business and paid or incurred
2. the amount of fringe benefit tax thereon by employee;
otherwise due from the employee but paid by b. liquidated or substantiated by receipts or
the employer for and in behalf of the other adequate documentation.
employee.
3. Motor Vehicle of any kind
“GMV” of the fringe benefit shall be determined by
dividing the monetary value of the fringe benefit
by the grossed up divisor. The Grossed up divisor
is the difference between 100% and the applicable 4. Household Expense
rates.
 68 |TAXATION LAW REVIEWER
Expenses for employees which are borne by
the employer for household personnel, such as
salaries of household help, personal driver of
the employee, or other similar personal
expenses (like payment for homeowners
association dues, garbage dues, etc.) shall be
taxable as fringe benefits.
5. Interest on loan at less than market rate to
the extent of the difference between the
market rate and actual rate granted
If the employer lends money to his employee
free of interest or a rate lower than 12%, such
interest foregone by the employer or the
difference of the interest assumed by the
employee and the rate of 12% shall be treated
as taxable fringe benefit.
The rule shall apply to installment payments
or loans with interest rate lower than 12%
starting January 1, 1998.
6. Membership fees, dues, and other expenses
borne by the employer for the employee in
social and athletic clubs and similar
organizations
7. Expenses for Foreign Travel
General Rule: fixed and variable
transportation, representation and other
allowances are subject to FBT.
Exception: if incurred or reasonably expected
to be incurred by employee in the performance
of his duties, subject to the following
conditions:
a. ordinary and necessary in the pursuit of
employer’s business and paid or incurred
by employee;
b. liquidated or substantiated by receipts or
other adequate documentation.
8. Holiday and Vacation Expenses
9. Educational Assistance to the employee or his
dependents
General Rule: taxable fringe benefit
Exceptions:
a. education/study is directly connected
with employer’s trade or business;
b. with a written contract that employee
shall remain employed with the employer
for a period of time mutually agreed upon
by the parties; or
c. the assistance was provided through a
competitive scheme under the
scholarship program of the company
employer.
10. Insurance Premium
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
General Rule: the cost of life or health
insurance and other non-life insurance
premiums borne by the employer are taxable
fringe benefit.
Exceptions:
a. cost of premiums borne by the employer
for the group insurance of employees;
b. contributions of the employer for the
benefit of employee to the SSS, GSIS, and
similar contributions arising from
provisions of any existing law.
Stock Options are Subject to Fringe Benefit – The
basis is the difference between the fair market
value and the exercise price at the time of exercise.
NON-TAXABLE FRINGE BENEFITS:
A. Fringe benefits not considered as gross
income:
1. if it is required or necessary to the
business of employer
2. if it is for the convenience or advantage of
employer
B. Fringe Benefit that is not taxable under Sec.
32 (B) – Exclusions from Gross Income
C. Fringe benefits not taxable under Sec. 33
Fringe Benefit Tax:
1. Fringe Benefits which are authorized and
exempted under special laws, such as the
13th month Pay and Other Benefits with
the ceiling of P30, 000.
2. Contributions of the employer for the
benefit of the employee to retirement,
insurance and hospitalization benefit
plans;
3. Benefits given to the Rank and File
Employees, whether granted under a
collective bargaining agreement or not;
and
4. De minimis benefits –These are facilities
and privileges of relatively small value
and are offered or furnished by the
employer to his employees merely as
means of promoting their health,
goodwill, contentment or efficiency. De
minimis benefits shall not be subject to
income tax, hence not subject to
withholding tax on compensation income
of both managerial and rank and file
employees.
The excess of the de minimis benefits over
their respective ceilings prescribed shall be
considered as part of other benefits and the
employee receiving it will be subject to tax
only on the excess over the P30,000 ceiling.
(R.R. 10-2008)
The term “Rank and File Employees” shall mean
all employees who are holding neither managerial
 69

nor supervisory position as defined in the Labor The housing fringe benefits shall use the following
Code. formula:

Fringe benefits given to a rank-and-file employee HOUSING FBT BASE

are treated as part of his compensation income PRIVILEGE
subject to income tax and withholding tax on
compensation income, which must be withheld Lease of residential MV= 50% X rental
and deducted by his employer from the property for payments
compensation income of his employee. residential use of
employees. Where:
Basic Rules on FBT MV= monetary value
1) Fringe benefits given to supervisory or of the FB
managerial employee is subject to the FBT.
Assignment of MV= [5% (FMV or
2) Fringe benefits given to rank and file residential property ZV, whichever is
employee (whether under a collective for use of employees. higher) x 50%]
bargaining agreement or not) is NOT subject
to FBT but part of compensation income Where:
subject to income tax. ZV=Zonal Value MV=
Value of the land and
3) No FBT shall be imposed when the fringe improvement, as
benefit is required by the nature of, or declared in the Real
necessary to the trade, business or profession Property Declaration
of the employer, or when the fringe benefit is Form.
for the convenience or advantage of the
employer. (CONVENIENCE OF THE FMV = Fair Market
EMPLOYER RULE) Value as determined
by the Commissioner
4) De minimis benefit, whether given to rank of Internal Revenue.
and file employee or to supervisory or
managerial employee is not subject to FBT.
Purchase of MV= 5% X AC X 50%
residential property
VALUATION OF FRINGE BENEFITS
on installment bases Where:
The following are the general rules applicable in
for the use of AC = Acquisition
the valuation of fringe benefits:
employees. Cost, exclusive of
interest.
CONDITION VALUATION
(Monetary Value) Purchase of MV= FMV or ZV,
Rule 1: If the Benefit The value is the residential property whichever is higher.
(FB) is granted in amount granted or and ownership is
money, or is directly paid for. transferred in the
paid for the employer. name of the
employees.
Rule 2: If the FB is The value of the FB
granted or furnished by shall be equal to the
the employer in property FMV of the Nontaxable Housing Fringe Benefit
other than money and property as
ownership is transferred determined in The following housing benefits are not subject to
to the employee. accordance with fringe benefit tax:
SEC. 6 (E) of the
Code (Authority of 1. Housing privilege of the Armed Forces of the
the Commissioner Philippines (AFP) officials – i.e., those of the
to Prescribed Real Philippine Army (PA), Philippine Navy (PN)
Property Values). or Philippine Air Force (PAF);
Rule 3: If the FB is
granted or furnished by The value of FB is 2. A housing unit, which is situated inside or
the employer in property equal to the adjacent to the premises of a business or
other than money but depreciated value of factory. A housing unit is considered adjacent
ownership is not the property. to the premises of the business if it is located
transferred to the within the maximum of fifty (50) meters away
employee. from the perimeter of the business premises;
and
Housing Fringe Benefits
 70 |TAXATION LAW REVIEWER

3. Temporary housing for the employee who Expenses of the employee which are borne by the
stays in a housing unit for three (3) months or employer for household personnel, such as
less. salaries of household help, personal driver of the
employee, or other similar personal expenses (like
Motor Vehicle payment for homeowners association dues,
garbage dues etc.) shall be treated as taxable
The Motor vehicle fringe benefits shall use the fringe benefits.
following formula;

MOTOR VEHICLE FRINGE BENEFIT

PREVILEGE TAX BASE The following are treated as taxable fringe
benefits:
Purchase of motor MV = AC
vehicle in the name AC = Acquisition Cost 1. Expenses incurred by the employee but
of the employee paid by his employer;

2. Expenses paid by the employee but

Cash is given to the MV = Cash received by reimbursed by his employer. However, if
employee for the the employee the above expenditures are duly receipted
purchase of the for and in the name of the employer and
vehicle; ownership is However, please note these do not partake the nature of a
placed in the name that if the cash given personal expense attribute to the
of the employee. by the employee is employee whether or not the same are
subject to WTW, it duly receipted for in the name of the
shall not be FBT, employer.
anymore.
3. Personal expenses of the employee (like
Purchase of car in MV = AC/5 purchase of groceries for the personal
installment basis, consumption of the employee and his
the ownership which Where: family members) pad for or reimbursed
is placed in the AC = Acquisition Cost, by the employer to the employee whether
name of the exclusive of interest or not the same are duly receipted for in
employee. the name of the employer.

Representation and transportation allowances

Employer shoulders MV = Amount that are fixed in the amounts and regularly
a portion of the shouldered by the received by the employees as part of their monthly
purchase price, the employer. compensation income shall be considered as
ownership of which taxable compensation income subject to
is placed in the Withholding Tax on Wages.
name of the
employee. Interest on Loan at lesser than Market Rate

The following rules are applicable regarding the

Employer owns and MV = (AC/5) X 50% cost of money whenever an employee borrowed
maintains a fleet of money from his employer.
motor vehicles for
the use of the 1. If the employer lends money to his
business and the employee free of interest or at a rate
employees. lower than 12% per year, such interest
foregone by the employer of the difference
of the interest assumed by the employee
and the 12% rate shall be treated as
Employer leases and MV = 50% x rental
taxable fringe benefit.
maintains a fleet of payment
motor vehicles for
2. The benchmark interest rate of 12%
the use of the
shall remain in effect until revised by a
business and the
subsequent regulation.
employees.
3. This regulation shall apply to
installment payments or loans with
interest rate lower than 12% starting
Household Expenses
January 1, 1998.

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012


Membership Fees, Dues and other Expenses
Membership fees, dues and other expenses borne
by the employer for the employee in social and
athletic clubs or other similar organizations.
The entire expenditures shall be treated as a
taxable fringe benefits of the employee in full.
Expenses for Foreign Travel
Reasonable business expenses which are paid for
by the employer for the foreign travel of his
employee for the purpose of attending business
meetings or conventions shall not be treated as
taxable fringe benefits.
In this instance, the following rules shall apply:
a. Inland travel expenses (such as expenses
for food, beverages and local
transportation), except lodging cost in a
hotel for similar establishments)
amounting to an average of US$300.00 or
less per day, shall not be subject to fringe
benefit tax. The expense should be
supported by documents proving the
actual occurrences of the meetings or
conventions.
b. Cost of economy and business class
airplane ticket shall not be subject to
fringe benefit tax. However, 30% of the
cost of the first class airplane ticket shall
be subject to fringe benefit tax.
In the absence of documentary evidence showing
that the employee’s travel abroad was in
connection with business meetings or conventions,
the entire cost of the ticket, including cost of hotel
accommodations and other expenses incident
thereto shouldered by the employer, shall be
treated as taxable fringe benefits.
Traveling expenses, which are paid by the
employer for the travel of the family members of
the employee, shall be treated as taxable fringe
benefits of the employee.
The exemption of any fringe benefit from the
fringe benefit tax shall not be interpreted to mean
exemption from any other income tax imposed
under the Code except if the same is likewise
expressly exempted from any other existing law.
Thus, if the fringe is exempted from the fringe
benefit tax, the same may, however, still form part
of the employee’s gross compensation income
subject to income tax. Hence, it is likewise subject
to a withholding tax on compensation income
payment. (Rev. Reg. No. 3-98)
71
DE MINIMIS
The term “de minimis” benefits which are
exempted from the fringe benefits tax shall, in
general, be limited to facilities or privileges
furnished or offered by an employer to his
employees that are of relatively small in value.
These are offered or furnished by the employer
merely as means of promoting the health,
goodwill, contentment or efficiency of his
employees.
Rules on ‘De Minimis’ and ‘Other Benefits’
The following rules shall be observed in
determining the taxability of the ‘de minimis’ and
the P30,000 ‘other benefits’ ceiling under Section
32(b)(7)(e) of the Tax Code: (Sec 1, Rev Regs. No
10-2008)
1. the amount of the ‘de minimis’ benefits
conforming to the ceiling herein prescribed
shall not be considered in determining the
P30,000 ceiling of ‘other benefits’ excluded
from gross income under 32(b)(7)(e) of the Tax
Code.
2. The excess of the ‘de minimis’ benefits over
their respective ceiling prescribed by these
regulations shall be considered as part of the
‘other benefits’ and the employee receiving it
shall be subject to tax only on the excess over
the P30,000 ceiling.
3. The MWEs receiving ‘other benefits’
exceeding the P30,000 limit shall be taxable
on the excess benefits, as well as on his
salaries, wages and allowances, just like an
employee receiving compensation income
beyond SMW.
 72 |TAXATION LAW REVIEWER

Fringe Benefits Tax on Special Aliens

RECIPIENT OF FRINGE BENEFITS TAX RATE TAX BASE

1. Nonresidential alien individual (not engaged in the 25% FBT on the Monetary Value of
trade or business in the Philippines) GMV of the FB the FB divided by
75%

1) 2. a. Alien individual employed by regional or area 15% FBT on the Monetary Value of
headquarters of a multinational company or by regional GMV of the FB the FB divided by
operating headquarters f a multinational company. 85%
b. Alien individual employed by an offshore banking
unit of a foreign bank established in the Philippines;

3. Alien individual employed by a foreign service

contractor or by a foreign service subcontractor engaged 15% FBT on the Monetary Value of
in petroleum operation in the Philippines. GMV of the FB the FB divided by
85%
Any of their Filipino individual employees who are 15% FBT on the Monetary Value of
employed and occupying the same position as those GMV of the FB the FB divided by
occupied or head by the alien employers. 85%
4. Employees in special economic zones, including Clark Subject to the normal Monetary value of the
Special Economic Zone and Subic Special Economic and rate or the special FB divided by 85% or
Free Trade Zone. rates of 15% as 75%
provided above

4. Real property used in trade or business of the

taxpayer.
CAPITAL GAINS TAX/
DEALINGS IN PROPERTY

The term “dealings in property” refers to the

disposal through sale or exchange of
Ordinary Assets- are those assets that are
a. ordinary assets, or
primarily used in the ordinary course of trade or
b. capital assets.
business.
Sec. 39 - Capital Gains and Losses
Examples of Ordinary Assets:
1. Inventory intended for sale in the normal
Types of Property
course of business;
Ordinary assets shall refer to all real properties
a. Merchandise inventory
specifically excluded from the definition of capital
(finished goods, in process and
assets under Sec. 39(A)(1) of the Code, namely:
raw materials)
b. Real estate being held or being
1. Stock in trade of a taxpayer or other real
sold by real estate dealers; and
property of a kind which would properly be
c. Securities held or being sold by
included in the inventory of the taxpayer if on
dealers in securities.
hand at the close of the taxable year; or
2. Real property held by the taxpayer primarily
2. Real property used in business including
for sale to customers in the ordinary course of
real property held for rent.
his trade or business; or
3. Real property used in trade or business (i.e.,
3. Assets used in business subject to
buildings and/or improvements) of a
depreciation, such as equipment. (Sec
character which is subject to the allowance for
39A1, NIRC)
depreciation provided for under Sec. 34(F) of
the Code; or

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012


Capital assets shall refer to all real properties
held by a taxpayer, whether or not connected with
his trade or business, and which are not included
among the real properties considered as ordinary
assets under Sec. 39(A)(1) of the Code.
Capital Assets are those assets that are not
primarily used in the ordinary course of trade or
business.
Examples of Capital Assets:
a. Stock and securities held by tax payers
other than dealers in securities;
b. Interest in partnership and joint
venture;
c. Goodwill;
d. Real property not used in trade or
business like residential house and lot ;
and
e. Investment property.
Shares of stock are ordinary assets only to a dealer
in securities.
Shares of stock, like the other securities defined in
the NIRC, would be ordinary assets only to a
dealer in securities or a person engaged in the
purchase and sale of, or an active trader (for his
own account) in, securities. In the hands, however,
of another who holds the shares of stock by way of
an investment, the shares to him would be capital
assets. When the shares held by such investor
become worthless, the loss is deemed to be a loss
from the sale or exchange of capital assets. (China
Banking Corp. vs. Court of Appeals, et al., G.R.
No. 125508, July 19, 2000)
* Change of purpose
- when a taxpayer purchases a property for one
purpose and subsequently change his purpose for
holding the property, the determining factor in
classifying the asset held is the purpose of the
time of sale.
Example:
Miss Cruz purchased a tract of land in Baguio city
with an intention to construct a residential house.
She held the land for 5 yrs, but because of the
sudden increase in the market price of the land,
she subdivided it into lots and promoted the sale
of lots.
If the land were sold before its conversion to sub-
divided lots, the transaction would be a capital
asset. However, upon the subdivision of the land,
the lots became inventory (use in business).
Therefore, Miss Cruz’s original purpose would no
longer be the basis of classifying the land. It would
now be classified as ordinary asset.
Types of Gains from Dealings in Property
Ordinary Gain (Loss) vs. Capital Gain (Loss)
73
Ordinary gain is the gain derived from the
sale or exchange of ordinary assets including
gains from performance of services and
business. There is ordinary gain if the
business income is greater than the business
operating expenses. An ordinary loss is the
excess of business expenses and losses over
the business income of the taxpayer derived
from the sale or exchange of ordinary assets.
Capital gain is the excess of value received
over the determined cost from the sale or
exchange of a capital asset. A capital loss
refers to the excess of the determined cost
over the value received from the sale or
exchange of a capital asset.
Long Term Capital Gain vs. Short Term Capital
Gain
Long term capital gain arises from sale or
exchange of capital asset held for more than 12
months.
Short term capital gain arises from sale or
exchange of capital asset held for 12 months or
less.
Net Capital Gain vs. Net Capital loss
Net Capital Gain is the excess of the gains over
the losses on sale or exchanges of capital assets
during the taxable year.
Net Capital loss means the excess of the losses
over the gains on sales or exchanges of capital
assets during the taxable year.
Two conditions for a capital gain or a capital loss
to result.
Section 29(d)(4)(B) of the NIRC conveys that the
loss sustained by the holder of the securities,
which are capital assets (to him), is to be treated
as a capital loss as if incurred from a sale or
exchange transaction.
A capital gain or a capital loss normally requires
the concurrence of two conditions for it to result:
(1) There is a sale or exchange; and
(2) the thing sold or exchanged is a capital asset.
When securities become worthless, there is
strictly no sale or exchange but the law deems the
loss anyway to be "a loss from the sale or exchange
of capital assets". A similar kind of treatment is
given by the NIRC on the retirement of certificates
of indebtedness with interest coupons or in
registered form, short sales and options to buy or
sell property where no sale or exchange strictly
exists. In these cases, the NIRC dispenses, in
effect, with the standard requirement of a sale or
exchange for the application of the capital gain
and loss provisions of the code. (China Banking
 74 |TAXATION LAW REVIEWER

Corp. vs. Court of Appeals, et al., G.R. No. 125508, 1. If the property was acquired by purchase
July 19, 2000) on or after March 1, 1913, the basis is
acquisition cost. (March 1, 1913 refers to
Computation of the Amount of Gain or Loss

When a taxpayer sells a real or personal property,

he should deduct its cost from its selling price to
measure the gain or loss from the sales
transaction (Sec. 40, NIRC).
The gain from the sale or other disposition of
property shall be the excess of the amount realized
therefrom over the basis or adjusted basis for
determining gain, and the loss shall be the basis
or adjusted basis for determining determining loss
over the amount realized. The amount realized
from the sale or other disposition of property shall
be the sum of money received plus the fair market
value of the property received.
Special rules in Determining Acquisition Cost
(Cost Basis)
Section 40B of the NIRC provides the following
special rules in determining the basis (cost) of
property given for purposes of computing the gain
or loss on exchange of property.
the date of the first Income Tax Law in
the Philippines)
2. The fair market price or value as of the
date of acquisition, if the same was
acquired by inheritance; or
3. If the property was acquired by gift, the
basis shall be the same as if it would be
in the hands of the donor or the last
preceding owner by whom it was not
acquired by gift, except that if such basis
is greater than the fair market value of
the property at the time of the gift then,
for the purpose of determining loss, the
basis shall be the fair market value; or
4. If the property was acquired for less than
adequate consideration in money or
money’s worth, the basis of such property
is the amount paid by the transferee for
the property; or
5. The basis as defined in subsection (c) (5)
of section 40 NIRC, if the property was
acquired in transaction or loss is not
recognized under subsection (c) (2) of
section 40 NIRC.

HOLDING PERIOD OF CAPITAL ASSET

APPLY HOLDING PERIOD

Individual Taxpayer Holding Period Reportable Gain or Loss
Held for 12 mos. or less 100%
Held for more than 12 mos. 50%

Corporate Taxpayer HOLDING PERIOD NOT APPLICABLE

Capital gain and losses are to be reported in full mount regardless of the
number of years the capital asset is held.

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012

 75

Summary Treatment
LOSSES OF INDIVIDUAL vs. CORPORATION

Ordinary Loss Can be deducted from net capital gain if ordinary

gain is not enough to absorb it.
Individual
Taxpayer NOLCO Apply three year rule; can be deducted from ordinary
income or (net) capital gain.
Capital Loss Apply holding period. Deductible from capital gain
only
NCLCO Apply 1 year rule; subject to limit. Deductible from
net capital gain only.

Ordinary loss or NOLCO The same as individual taxpayer

Corporate Capital loss No holding period. Deductible from capital gain only.
Taxpayer NCLCO Net capital los carry-over (NCLCO) is not applicable.

Basis for Determining Gain or Loss

Selling Price or Fair Market Value

Received

Acquisition cost when purchased

Less

Fair market value (FMV) at date of

inheritance
Cost of Property Given
FMV at date of donation, or
acquisition cost of donor, whichever
is lower

= Gain or Loss Amount paid by the transferee, if

acquired for less than an adequate
consideration

Basis of Property Exchange

General Rule : Except as herein provided, upon
the sale or exchange of property, the entire
amount of the gain or loss, as the case may be,
shall be recognized.
Exception- No gain or loss shall be recognized if
in pursuance of a plan of merger or consolidation.
(Sec 40 C2)
TAX EXEMPT EXCHANGES
(Sec 40 C2)
No gain or loss shall be recognized if in pursuance
of a plan of merger or consolidation –
(a) A corporation, which is a party to a merger or
consolidation, exchanges property solely for stock
in a corporation, which is a party to the merger or
consolidation; or
(b) A shareholder exchanges stock in a
corporation, which is a party to the merger or
consolidation, solely for the stock of another
corporation also a party to the merger or
consolidation; or
(c) A security holder of a corporation, which is a
party to the merger or consolidation, exchanges
his securities in such corporation, solely for stock
or securities in such corporation, a party to the
merger or consolidation.
 76 |TAXATION LAW REVIEWER
No gain or loss shall also be recognized if property
is transferred to a corporation by a person in
exchange for stock or unit of participation in such
a corporation of which as a result of such exchange
said person, alone or together with others, not
exceeding four (4) persons, gains control of said
corporation: Provided, That stocks issued for
services shall not be considered as issued in return
for property.
Four Transactions Covered
1. Properties for stocks – in accordance with a
plan for merger or consolidation.
2. Stocks for Stocks- in accordance with a plan
for merger or consolidation.
3. Securities for stocks- in accordance with a
plan for merger or consolidation.
4. Exchange of property for corporate control.
Commissioner of Internal Revenue vs. Filinvest
Development Corporation, (G.R. No. 163653, July
19, 2011)
Facts:
On 3 January 2000, FDC received from
the BIR a Formal Notice of Demand to pay
deficiency income and documentary stamp taxes,
plus interests and compromise penalties for
deficiency income taxes which were assessed on
the taxable gain supposedly realized by FDC from
the Deed of Exchange it executed with FAI and
FLI, on the dilution resulting from the
Shareholders’ Agreement FDC executed with
RHPL as well as the “arm’s-length” interest rate
and documentary stamp taxes imposable on the
advances FDC extended to its affiliates. FAI
similarly received from the BIR a Formal Letter of
Demand for deficiency income assessed on the
taxable gain purportedly realized by FAI from the
Deed of Exchange it executed with FDC and FLI.
A. Transfer of properties in exchange of shares of
stocks. (Tax-free exchanges, Sec 40 C, NIRC)
The owner of 80% of the outstanding
shares of respondent Filinvest Alabang, Inc.
(FAI), respondent Filinvest Development
Corporation (FDC) is a holding company which
also owned 67.42% of the outstanding shares of
Filinvest Land, Inc. (FLI). On 29 November 1996,
FDC and FAI entered into a Deed of Exchange
with FLI whereby the former both transferred in
favor of the latter parcels of land in exchange of
FLI’s shares of stock. As a result of the exchange,
FLI’s ownership structure was changed.
Stockholder % of Shares % of Shares
Held Prior to Held After the
the Exchange Exchange
FDC 67.42% 61.03%
(Diluted)
FAI 0 9.96%
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
1st Issue : Whether or not the assessment on
income tax is valid on the ground that the
exchange of properties does not fall under the tax-
free exchange as provided in Sec. 34 (C)(2), now
Sec. 40 (C)(2) of the NIRC.
Ruling:
No. It is evident from the categorical
language of Section 34 (c) (2) of the 1993 NIRC
(now Sec. 40 c2) which provides that gain or loss
will not be recognized in case the exchange of
property for stocks results in the control of the
transferee by the transferor, alone or with other
transferors not exceeding four persons. Rather
than isolating the same as proposed by the CIR,
FDC's 61.03% control of FLI's should, therefore,
be appreciated in combination with the new
shares issued to FAI which represents 9.96%
control of said transferee corporation. Together
FDC's 61.03% and FAI's 9.96% clearly add up to
70.99% ownership of FLI. Since the term "control"
is clearly defined as "ownership of stocks in a
corporation possessing at least fifty-one percent of
the total voting power of classes of stocks entitled
to one vote" under Section 34 (c) (6) [c] of the 1993
NIRC, the exchange of property for stocks between
FDC FAI and FLI clearly qualify as a tax-free
transaction under paragraph 34 (c) (2) (now Sec 40
(c)(2) of the Tax Code) of the same provision.
Inasmuch as the combined ownership of FDC and
FAI of FLI's outstanding capital stock adds up to
a total of 70.99%, it stands to reason that neither
of said transferors can be held liable for deficiency
income taxes the CIR assessed on the supposed
gain which resulted from the subject transfer.
B. Theoretical Interest. Inter-company advances
not subject to interest.
Filinvest Development Corporation
extended advances in favor of its affiliates and
supported the same with instructional letters and
cash and journal vouchers. The BIR assessed
Filinvest for deficiency income tax by imputing an
“arm’s length” interest rate on its advances to
affiliates. Filinvest disputed this by saying that
the CIR lacks the authority to impute theoretical
interest and that the rule is that interests cannot
be demanded in the absence of a stipulation to the
effect.
2nd ISSUE: Can the CIR impute theoretical
interest on the advances made by Filinvest to its
affiliates?
Ruling:
NO. Despite the seemingly broad power
of the CIR to distribute, apportion and allocate
gross income under (now) Section 50 of the Tax
Code, the same does not include the power to
impute theoretical interests even with regard to
controlled taxpayers’ transactions. This is true
even if the CIR is able to prove that interest
expense (on its own loans) was in fact claimed by
the lending entity. The term in the definition of

gross income that even those income “from
whatever source derived” is covered still requires
that there must be actual or at least probable
receipt or realization of the item of gross income
sought to be apportioned, distributed, or allocated.
Finally, the rule under the Civil Code that “no
interest shall be due unless expressly stipulated
in writing” was also applied in this case.
Preferential Tax Treatment for Capital Gain
(Loss)
The tax rules for gains or losses from sales or
exchange of capital assets over ordinary assets are
as follows:
1. Net capital gain is added to ordinary gain but
net capital loss is not deductible from
ordinary gain.
2. Net ordinary loss is deductible from net
capital gain.
3. Capital losses are deductible only to the
extent of the capital gain.
4. For the individual, the reportable percentages
of capital gain or loss hall be:
a. 100% if the capital asset is held for one
year or less than one year (short term)
(Sec 39B2, NIRC)
b. 50% if the capital asset is held for more
than one year (long term).
5. There is a net capital loss carry-over on the
net capital asset’s loss in a taxable year which
may be deducted as a short-term capital loss
from the net capital gain of the subsequent
taxable year; provided that the following
conditions shall be observed:
a. The taxpayer is other than a
corporation;
b. The amount of loss does not exceed the
income before exemptions at the year
when the loss was sustained (Sec. 39D,
NIRC; EO No. 37); and
c. The holding period should not exceed
twelve months. (Sec. 39D, NIRC)
Capital Gains or Losses Sustained by a jurisdiction over the place, or the Building
Corporation
When a capital gain or capital loss is sustained by
a corporation, the following rules shall be
observed:
1. There is no holding period; hence there is no
capital loss carry-over.
2. Capital gains and losses are recognized to the
extent of their full amount.
3. Capital losses are deductible only to the
extent of capital gains.
4. Net capital losses are not deductible from
ordinary gain or income but ordinary losses
are deductible from net capital gains
Dealings in Real Property
77
The disposition of real property made by
individuals, estates and trusts, and domestic
corporation shall be taxed according to
classification whether or not the property is used
in trade or business.
1. By Individual - 6% final tax
Tax Base: Whichever is the highest among:
a. Selling price
b. FMV as determined by CIR (zonal value)
c. FMV as determined by the City or
Provincial Assessor (assessed value)
Exemption: Capital gains from sale of
principal residence if-
a. The proceeds are utilized in acquiring
new residence within 18 calendar
months from the date of sale;
b. Commissioner is notified within 30
days from the sale or disposition;
c. The exemption can be availed of once in
every 10 years;
d. The 6% capital gains tax due on the
presumed capital gains shall be
deposited in interest bearing account
with an authorized bank under an
escrow agreement.
2. By corporation – 6% final tax on sale of
lands and/or buildings not used in the
business.
Sale of Principal Residence
A principal residence is the family home of the
individual taxpayer. It refers to the dwelling
house, including the land on which it is situated,
wherein an individual including his family resides
as a permanent dwelling, or whenever absent,
wherein the individual intends to return. (Sec. 2.1,
Rev. Reg. No. 14-2000)
It is the residential address of a natural person as
certified by the Barangay Chairman who has
Administrator (in lieu of said Punong Barangay) if
the residence is a condominium or the individual
taxpayer’s address as indicated in the latest
income tax return.
As a general rule, the sale of principal residence is
subject to a capital gains tax of 6% based on the
selling price or zonal value, whichever is higher.
Dealings in Shares of Stocks of Philippine
Corporations
These transactions refer to the sale of equity
securities of other corporations which are
classified as either capital assets or ordinary
assets.
 78 |TAXATION LAW REVIEWER

Stocks classified as capital assets are stocks and
securities held by a taxpayer other than dealers in
securities. If sold, these securities are subject to
capital gains tax (final tax).
Dealers in securities include all persons who for
their own account are engaged in the sale of
stocks, bonds, exchanges, bullions, coined money,
bank notes, promissory notes, or other securities
as licensed by the SEC.
The gain (loss) from sale of securities held by
dealers in securities are ordinary income (loss)
subject to normal tax

SALE OF SHARES OF STOCK

Traded in stock exchange:
Stocks held by dealers in Inventory Percentage tax of ½ of 1% of the
securities selling price
and
subject to normal tax based on
taxable income

Not traded in stock exchange:

5% if the net capital gain is not over

P100,000; an
Stocks not held by dealers in Capital asset 10% on any amount in excess of
securities P100,000

Filing and payment of capital gains

tax – within 30 days after each
transaction

Traded in stock exchange:

½ of 1% of the selling price

(exempt from capital gains tax)

Fling and payment of percentage tax

– within 5 days from the date
withheld by the broker

WITHHOLDING TAXES - FWT and CWT

Final Withholding Taxes on Passive Income under BIR Form 1601- F

(Quick view)

RATE ON RATE ON
NATURE OF INCOME INDIVIDUAL CORPORATE
PAYEE PAYEE
1. Interest on foreign loans payable to Non-resident foreign corporation 20%
2. Interest and other income payments on foreign currency transactions 10%
payable to OBU’s an FCDU’s
3. Cash or property dividend payment by domestic corporation to citizen 10%
and resident aliens

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012

 79
4. Cash or property dividend payment by domestic corporation to
nonresident foreign corporation
 Without reciprocity rule 30%
 With reciprocity rule 15%
5. Cash or property dividend payment by domestic corporation to 20%
nonresident alien, doing business in the Philippines
6. Distributive share of individual partner in general commercial 10%
partnership
7. Share of nonresident alien in the distributable income of general 20%
commercial partnership
8. All kinds of royalty payments to citizen, resident alien, nonresident 20% 20%
alien doing business in the Philippines, domestic and resident foreign
corporation except royalty income on books and cinematographic
films
9. On prizes exceeding P10,000 and other winnings paid to individuals 20%
10. Branch remittance by all corporations except PEZA, SBMA and CDA 15%
registered

11. Gross rentals , lease and charter fees paid to nonresident lessor of 4.5%
foreign vessels
12. Gross rentals, lease and charter fees paid to nonresident lessor of 7.5%
foreign aircraft, machinery and equipment
13. On payments to oil exploration service contractors/subcontractors 8% 8%
14. Payments to citizen or alien employed by Foreign Petroleum Service 15%
Contractors/ Sub-contractors, Offshore Banking Units and Regional
or Area Headquarters and Regional operating Headquarters of
15. Payments to NRA not doing business in the Phils. except on sale of 25%
shares of stock and real property.
16. Payment to nonresident individuals/foreign corporate 25% 25%
cinematographic film owners/lessors or distributors
17. Other payments to NR-FC 30%
18. Royalties paid to NRA-ETB on cinematographic films and similar 25%
works.
19. Final tax on interest or other payments upon tax-free covenant bonds, 30%
mortgages, deeds of trust or other obligations under Sec. 57C of NIRC.
20. Royalties paid to citizens, RAs and NRA-ETB in the Phils. on books, 10%
other literary works and musical composition.
21. Tax informer’s cash reward 10% 10%

Tax Rates on Interest Paid on Deposits and Yield on Deposit Substitutes (BIR Form 1602)

NATURE OF INTEREST INCOME Rate on Individual Rate on

Payee Corporate Payee
1. on peso savings deposit 20% 20%
2. on peso time deposits 20% 20%
3. on deposit substitutes 20% 20%
4. on government securities 20% 20%
5. on pre-terminated long term deposit:
less than 3 years 20% 20%
3 years to less than 4 years 12% 20%
4 years to less than 5 years 5% 20%
6. on foreign currency deposits 7.5% 7.5%

CREDITABLE WITHHOLDING TAXES

INCOME PAYMENTS SUBJECT TO EXPANDED WITHHOLDING TAX SYSTEM AND TAX RATES
(BIR FORM 1601E)
80 |TAXATION LAW REVIEWER
Nature of Income Rate on Individual TP Rate on Corporate
Payee
1. Professional talent fees (lawyers, CPAs, etc.)

2. Professional entertainers, professional

athletes and movie, stage, radio, television
and musical directors:
 annual income does not exceed P720,000 10%
 annual income exceeds P720,000 15%

3. Management and technical consultants 10%

3. Bookkeeping agents and agencies 10%
4. Insurance agents and adjusters 10%
5. Fees of directors who are not employees of the 15%
company

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012


6. Real property rentals
7. Cinematographic film rentals
8. Prime contractors/subcontractors
9. Income distribution to beneficiaries of estates
and trusts.
10. Brokers and agents
11. Income payments to partners of general
professional partnership
 P720,000 and below
 Exceeds P720,000
12. Payments by credit card companies
Payments by government unit to
 Local suppliers
 Suppliers of services
13. Income payments by top 5,000 corporation to
their local suppliers
14. Additional payments to government personnel
from importers, shipping and airline
companies for overtime services.
WITHHOLDING TAXES
Withholding taxes is a systematic way of collecting
taxes at source, an indispensable method of
collecting taxes to ensure adequate revenue for the
government.
The withholding tax agent who is usually an
employer or a person from whom the income is
derived withholds the appropriate amount of taxes
from TPs.
Withholding Tax at Source
Part of tax system which collects through
withholding agents (payor) or employers the
appropriate income taxes due as they are earned
and before earnings are paid to the payees or
employees.
Classification of Withholding Tax at Source
1. Final withholding Tax (FWT)
2. Creditable Withholding Tax (CWT)
FWT vs. CWT
Final Withholding Tax (FWT)
Under the FWT system, the amount of income tax
withheld by the withholding agent is constituted
as a full and final payment of the income tax due
from the payee on the said income.
The liability for the payment of the tax rests
primarily on the payor as a withholding agent.
The payee is not required to file an ITR for the
particular income, the final tax on which has been
withheld. (Sec. 79B, NIRC)
Creditable Withholding Tax (CWT)
81
5% 5%
5% 5%
2% 2%
15%
10% 10%
15%
0.5% 0.5%
1% 1%
2% 2%
1% 1%
15%
Under the CWT system, taxes withheld on certain
payments are intended to equal or al least
approximate the tax due of the payee on said
income.
The income recipient is still required to file his ITR
(Sec. 51), either to report the income and/or pay
the difference between the Tax withheld and the
tax due on the income.
A tax withheld on income payments covering the
expanded withholding tax from compensation
income is creditable in nature. (Sec 57B)
Persons Required to Deduct and Withhold
1. In general, any juridical person, whether or
not engaged in business or trade.
2. an individual, with respect to payments
made in connection with his trade or
business. For taxable sale, exchange or
transfer of real property, individual buyers
who are not engaged in trade or business are
also constituted as withholding agents.
3. All government offices including GOCCs, as
well as provincial, city and municipal
governments.
Time of Withholding
The obligation of the payor to deduct and withhold
the tax arises at the time an income is paid or
payable, whichever comes first. The term
“payable” refers to the date the obligation becomes
due, demandable or legally enforceable.
CIR vs. Asian Transmission Corporation,
(G.R. No. 179617, January 26, 2011)
 82 |TAXATION LAW REVIEWER
 Taxpayer need not prove its losses in a claim
for refund of excess income tax payments.
 In a claim for refund of excess CWT, the
taxpayer-claimant need not prove actual
remittance of the CWT to the BIR.
Facts:
Respondent Asian Transmission Corp.
(ATC) filed a claim for refund of its excess CWT for
taxable years 2000 and 2001. The CTA denied the
claim for 2000 because the amount was carried
forward by ATC to the following year, despite
having indicated in its 2000 ITR its option to claim
the same as a tax credit certificate. However, the
CTA granted the claim for 2001.
Petitioner CIR appealed to the Supreme
Court and argued that ATC failed to prove actual
remittance of the CWT to the BIR, and that ATC
failed to establish the losses it had incurred in the
period subject of the claim.
Issue: Is ATC entitled to the refund?
Ruling:
Yes. For a claim for a tax credit certificate
or refund to be granted, the taxpayer must
establish that:
• The claim for refund was filed within 2 years as
prescribed in Section 230 (now 229) of the Tax
Code;
• The income upon which the taxes were withheld
were included in the return of the recipient; and
• The fact of withholding is established by a copy
of the statement (BIR Form 1743-A) duly issued
by the payor (withholding agent) to the payee
showing the amount paid and the amount of tax
withheld.
ATC complied with all 3 requirements.
There is no further need to prove actual
remittance of the withholding taxes to the BIR, as
remittance is the responsibility of the withholding
agent and not of the taxpayer-claimant. The
payors are constituted as withholding agents of
the BIR and the taxes they withhold are held in
trust for the government. In the event that they
commit fraud against the government by not
remitting the taxes withheld, such act should not
prejudice the claimant.
The Certificates of Creditable Tax
Withheld at Source issued by the withholding
agents of the government are prima facie proof of
actual payment by ATC to the government itself
through said agents.
Finally, ATC has fulfilled its duty to
establish the amount of its losses. Other than the
bare assertion that ATC must establish its losses,
the CIR failed to point to any circumstance or
evidence that would cast doubt on ATC’s sworn
declaration that it incurred losses in 2000 and
2001.
The Supreme Court agreed that the
taxpayer bears the burden to establish the losses,
but then the taxpayer has fulfilled this duty when
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
it presented its income tax return showing the
incurred losses. It must be noted that the CTA
earlier ruled that the burden of proof as to whether
the taxpayer incurred net losses from its
operations rests on the BIR. This is the reason why
the BIR is authorized by law to examine the books
and accounting records to ascertain the
truthfulness of the taxpayer’s declaration in its
income tax return.
Rizal Commercial Banking Corporation vs.
Commissioner of Internal Revenue,
(G.R. No. 170257, September 7, 2011)
Facts:
RCBC is a private domestic commercial
bank engaged in general banking operations. On
15 August 1996, RCBC received a Letter of
Authority (LOA) covering all internal revenue
taxes from 01 January 1994 to 31 December 1995.
RCBC executed a Waiver of the Defense of
Prescription up to 31 December 2000. Respondent
issued on 27 January 2000 a Formal Letter of
Demand (FLD).
On 24 February 2000, RCBC filed a
protest. On 20 November 2000, RCBC filed a
petition for review before the CTA. Following the
reinvestigation requested, RCBC received another
FLD on 06 December 2000 which drastically
reduced the amount previously assessed. On the
same date, RCBC paid all tax deficiencies except
the assessments for deficiency Final Tax on FCDU
Income and DST, which remained to be subjects of
its petition for review.
The CTA-1st Division upheld the
assessment for the remaining deficiency taxes and
ordered the RCBC to pay the amount. RCBC
elevated the case to the CTA En Banc but the
petition was denied for lack of merit.
Issues:
1. Whether or not the petitioner, by paying the
other tax assessments covered by the waiver, is
rendered estopped from questioning the validity of
the said waivers; and
2. Whether or not the petitioner, as payee-bank,
can be held liable for deficiency onshore tax, which
is mandated by law to be collected at source in the
form of FWT.
Ruling:
1st Issue: Yes. RCBC is estopped from questioning
the validity of the waivers. RCBC averred that the
waiver executed by it is invalid for failure to
indicate acceptance of the CIR. Petitioner further
argues that the principle of estoppel does not
signify a clear intention on its part to give up its
right to question the validity of the waivers.
Estoppel is clearly applicable to the case.
A party is precluded from denying his own acts,
admissions, or representations to the prejudice of
the other party in order to prevent fraud and

falsehood. RCBC’s partial payment of the revised
assessments issued within the extended period
impliedly admitted the validity of the waivers.
2nd issue: Yes. Petitioner is liable for the payment
of deficiency onshore tax on interest income
derived from foreign currency loans, pursuant to
Sec 24(e)(3) of the Tax Code of 1993.
RCBC contended that because the
onshore tax was collected in the form of a FWT, it
was the borrower, constituted by law as the
withholding agent, that was primarily liable for
the remittance of the said tax.
Petitioner erred in citing RR 2-98 because
the same governs collection at source on income
paid only on or after January 1, 1998. Hence, said
regulations obviously does not apply in the case.
The liability of the withholding agent is
independent from that of the petitioner. The
former cannot be made liable for the tax due
because it is the petitioner who earned the income
subject to withholding tax. The liability for the tax
remains with the petitioner because the gain was
realized and received by him.
The withholding agent is liable only
insofar as he failed to perform his duty to withhold
the tax and remit the same to the government.
While the payor-borrower can be held accountable
for its negligence in performing its duty to
withhold the amount of tax due on the transaction,
petitioner, as the taxpayer and the one which
earned income on the transaction, remains liable
for the payment of tax as the taxpayer shares the
responsibility of making certain that the tax is
properly withheld by the withholding agent, so as
to avoid any penalty that may arise from the non-
payment of the withholding tax due.
Taxpayer bank cannot evade its liability
for foreign currency deposit unit onshore tax by
shifting the blame on the payor-borrower as the
withholding agent. As such, it is liable for payment
of deficiency onshore tax on interest income
derived from foreign currency loans, pursuant to
now Section 24(c) (3) of the National Internal
Revenue Code.
TRANSFER TAXES
TRANSFER TAXES are taxes imposed upon the
gratuitous disposition of private property. They
are not property taxes because their imposition
83
does not res upon general ownership but rather
they are privilege tax imposed on the act of
passing ownership of property.
TWO TYPES OF GRATUITOUS TRANSFERS
1. Donation Mortis Causa- transmission of
properties by operation of law (succession) due
to the death of the owner (without
consideration).
 Subject to Estate Tax if transfer was
effected upon the death of the transferor.
2. Donation Inter Vivos- transfer effected during
the lifetime of the owner without consideration.
 Subject to Donor’s tax if transfer was made
during the lifetime of the donor
KINDS OF TRANSFER TAXES
1. Estate Tax
2. Donor’s Tax
ESTATE TAX
It is the tax on the privilege of transmitting
properties upon death and to the special privilege
that a person is given in controlling to a certain
extent the disposition of his properties to take
effect upon his death.
 It accrues as of the death of the decedent
notwithstanding the postponement of the
actual possession or enjoyment of the
estate by the beneficiary. The accrual of
the tax is distinct from the obligation to
pay the same.
 The statute in force at the time of death
governs the estate taxation.
 The transfer of the property of a decedent
to his heirs and beneficiaries takes place
at the moment of death without any
interruption.
 It is imposed on the transfer of the
decedent‘s estate to his lawful heirs and
beneficiaries based on the fair market
value of the net estate at the time of the
decedent’s death.
REASONS JUSTIFYING THE IMPOSITION OF
ESTATE TAX
1. Benefit-Received Theory – considers the
service rendered by the government in the
distribution of the estate of the decedent, either
by law or in accordance with his wishes. For
the performance of these services and other
benefits that accrue to the estate and the heirs,
the State collects the tax.
2. Privilege Theory/ State Partnership Theory –
inheritance is not a right but a privilege
granted by the state, and large estates have
been acquired only with the protection of the
State. Consequently, the State as a passive
and silent partner in the accumulation of
 84 |TAXATION LAW REVIEWER

property has the right to collect the share Over But Tax Plus Excess
which is properly due to it. Not shall Over
Over be
3. Ability to Pay Theory – receipt of inheritance
- 200K Exempt - -
which is in the nature of an unearned wealth
or windfall, place assets into the hands of the 200K 500K 0 5% 200K
heirs and beneficiaries thereby creating an 500K 2M 15K 8% 500K
ability to pay the tax and thus contributes to 2M 5M 135K 11% 2M
government income. 5M 10M 465K 15% 5M
10M - 1,215K 20% 10M
4. Redistribution of Wealth Theory - the receipt of
inheritance is a contributing factor to the Legend: K - Thousand
inequalities in wealth and incomes. The M - Million
imposition of death tax reduces the property
received by the successor, thus helping bring CLASSIFICATION OF DECEDENT
about a more equitable distribution of wealth
in society. The tax base is the value of the a. Resident decedent-(Resident/Non-resident
property and the progressive scheme of citizen/Resident Alien;
taxation is precisely motivated by the desire to b. Non-resident decedent- Non-resident Alien.
mitigate the evils of inheritance in the present
form. GROSS ESTATE
Only properties within the CONTROL of the
NATURE OF ESTATE TAX decedent
A. Resident alien and citizen:
1. Tax on the right to transfer property at death  All properties, real or personal, tangible
and on certain transfers which are made by or intangible, wherever situated.
law equivalent to testamentary dispositions
and is measured by the value of the property; B. Non-resident alien:
2. It is imposed on the basis of the net estate  only properties situated in the
considered as a unit. The first Php200,000 of Philippines
the net estate is exempt.  With respect to intangible personal
3. Estate tax is not a property tax but rather an property, its inclusion is subject to the
excise tax. rule of reciprocity.
4. It is an excise tax and its object is to the
shifting of economic benefits and enjoyment of INTANGIBLE PROPERTIES HAVING SITUS IN
property from the dead to the living. THE PHILIPPINES (Sec. 104, NIRC)
1. Franchise which must be exercised in the
Philippines;
ESTATE TAX FORMULA: 2. Shares, obligations or bonds issued by any
corporation or “sociedad anonima” organized
Gross Estate or constituted in the Philippines in accordance
Less: Deductions (Sec. 86) with its laws;
Net Estate before share of surviving spouse 3. Shares, obligations or bonds issued by any
Less: Share of surviving spouse foreign corporation eighty-five percent (85%)
Net Share before special deductions of the business of which is located in the
Less: Special Deductions
Philippines;
Family Home
Standard Deduction (P1M) 4. Shares, obligations or bonds issued by any
Medical Expenses foreign corporation, if such shares, obligations
Taxable Net Estate or bonds have acquired a business situs in the
X Tax Rate (Sec. 84) Philippines;
Tax Due 5. Shares or rights in any partnership, business
Less: Estate Tax Credit (Sec.86 [E] or 110 [B]) or industry established in the Philippines.
Tax Payable
RULE OF RECIPROCITY applies only to
intangible personal property of non-resident alien.
Estate Tax Rates
No tax shall be collected in respect of intangible
personal property:
a. if the decedent at the time of his death was a
citizen and resident of a foreign country which
at the time of his death did not impose a transfer
tax in respect of intangible personal

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012

 85

property of citizens of the Philippines not GROSS ESTATE AND NET ESTATE
residing in that foreign country(Total
Exemption) OR Composition of the Gross Estate of a Decedent

b. if the laws of the foreign country of which D Real Tangible Intangible

the decedent was a citizen and resident at E Property Property Personal
the time of his death allows a similar C Property
exemption from transfer taxes in respect of E
intangible personal property owned by D

Without

Without

Without
With

With

With
Filipino citizens not residing in that foreign E

in

in

in
country. (Partial Exemption) [Sec 104] N
T
R
SITUS OF AN INTANGIBLE PERSONAL E
PROPERTY S
I
General Rule: The situs of an intangible personal D
property is at the domicile or residence of the E
owner. This is known as the principle of "mobilia N
sequuntur personam."

Included

Included

Included

Included

Included

Included
T

Exception: D
1. when it is inconsistent with express E
provisions of statute, or C
E
2. when justice does not demand that it should D
be, as when the property has in fact a situs E
elsewhere. N
T
N
GROSS ESTATE VIS-À-VIS NET ESTATE O
N
Net taxable estate means gross estate less R
allowable deductions and special exemptions. E
S
Gross estate I
Less: deductions/exemptions D
E Included*
Excluded

Excluded
Net estate
Included

Included

excluded

N
 The computation of the gross estate is not T
only the body of the property but it
includes the yields or fruits of such D
property. E
C
Example: E
The apartment owned by the decedent D
inclusive of all the rental income E
therefrom up to the time of death. Cash N
in bank inclusive of all interests income T
earned up to the time of death.
Intangible personal properties are included in the
gross estate of a non-resident decedent if they are
located in the Philippines unless exempted on the
basis of the Principle of Reciprocity.

Other Items Included in Gross Estate

Properties not Owned by the Decedent which Still

Form Part of the Gross Estate
1. DECEDENT’S INTEREST
Gross estate for purposes of estate taxation of
Filipinos, whether residents or non-
DETERMINATION OF residents shall include the value of real
property and personal property wherever
 86 |TAXATION LAW REVIEWER
situated to the extent of the interest of the
decedent at the time of his death.
2. TRANSFER IN CONTEMPLATION OF
DEATH
It is the thought of death as the controlling
motive which induces the disposition of the
property for the purpose of avoiding the tax.
Requisites:
1. It must be a transfer for insufficient
consideration or without consideration.
2. The enjoyment or possession will not vest
on the transferee before the transferor’s
death.
Includes:
1. transfer by trust or otherwise, in
contemplation of, or intended to take
effect in possession or enjoyment at or
after his death; or
2. transfer by trust or otherwise, with
retention or reservation of
a. the possession or enjoyment of or the
right to the income or fruits from the
property, or
b. the right, either alone or in
conjunction with any person, to
designate the person who shall
possess or enjoy the property or the
income there from
Exception: In case of bona fide sale for an
adequate and full consideration in money or
money's worth
Amount included in the GE: interest therein
Circumstances Taken into Account:
1. Age and state of health of the decedent at
the time of gift, especially where he was
aware of a serious illness;
2. Length of time between the gift and the
date of death;
3. Concurrent making of a will or making a
will within a short time after the transfer
3. REVOCABLE TRANSFER
a. With reserved power to alter, amend,
revoke or terminate -transfer, by trust or
otherwise, where the enjoyment thereof
was subject to any change through the
exercise of a power (in whatever capacity
exercisable) by the decedent alone or by
the decedent in conjunction with any
other person (without regard to when or
from what source the decedent acquired
such power, to alter, amend, revoke or
terminate;
b. Or where any such power is relinquished
in contemplation of the decedent's death.
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
Exception: In case of bona fide sale for an
adequate and full consideration in money or
money’s worth.
Amount included in the GE: interest therein
4. TRANSFER UNDER GENERAL POWER OF
APPOINTMENT
 Will work to relieve the heir from the
imposition of the estate tax upon his
death
 The two transfers will be taxed but once.
A power of appointment is the right to
designate the person or persons who will
succeed to the property of the prior decedent.
It may be exercised by the decedent:
a. By will; or
b. By a deed executed in
contemplation of, or intended to take
effect in possession or enjoyment at, or
after his death;
c. By deed under which he has
retained for his life or any period not
ascertainable without reference to his
death or for any period which does not in
fact end before his death:
1. The possession or enjoyment of, or
the right to the income from, the
property; or
2. The right, either alone or in
conjunction with any person, to
designate the persons who shall
possess or enjoy the property or the
income therefrom; except in case of
a bona fide sale for an adequate and
full consideration in money or
money's worth.
Exception: In case of bona fide sale for an
adequate and full consideration in money and
money’s worth
Amount included in the GE: interest therein
General Power Of Appointment – when it
authorizes the donee to appoint any person he
pleases, including himself, his spouse, his
estate, his executor or administrator, and his
creditor thus having full dominion over the
property as though he owned it.
Special Power Of Appointment – when the
donee can appoint only among a restricted or
a designated class or persons other than
himself.
 Properties passing under a general power of
appointment(GPA) exercised by the decedent
form part of his gross estate because the

decedent still has the control to dispose said
properties upon his death.
5. PROCEEDS OF LIFE INSURANCE
 Proceeds of life insurance are not subject
to income tax
 Proceeds may or may not be included as
part of gross estate depending on the
designation of the beneficiary.
The following shall form part of the gross
estate:
 When the beneficiary is the estate of the
deceased, his executor or administrator,
irrespective of whether or not the insured
retained the power of revocation; or
 When the beneficiary is other than the
decedent’s estate, executor or
administrator, when designation of
beneficiary is revocable, that is, when the
designation of the beneficiary is not
expressly made irrevocable.
The proceeds of life insurance are NOT
TAXABLE in the following cases:
a. proceeds of a group insurance policy
taken out by the company for its
employees;
b. accident insurance proceeds;
c. amount receivable by any beneficiary
irrevocably designated in the policy of
insurance by the insured;
d. proceeds of insurance policies issued by
the GSIS to the government official and
employees;
e. benefits accruing under the SSS law;
f. proceeds of life insurance payable to heirs
of deceased members of military
personnel.
NOTE: WHEN the designation of the
beneficiary is not clear, the policy is
considered as revocable, thus the proceeds
paid to the beneficiary shall still form part of
the gross estate of the decedent.
If the insured named a third person as his
beneficiary in his life insurance policy, and
the policy is IRREVOCABLE, the premium
paid is a gift from the insured to the
beneficiary, which may be subject to a donor’s
tax. If the premium is paid on installment, it
is an additional gift which may again be
covered by a donor’s tax.
6. TRANSFER FOR INSUFFICIENT
CONSIDERATION
Applies when the decedent’s property is
transferred:
a. in contemplation of death,
b. revocable transfers, or
87
c. passed under a general power of
appointment for a consideration in money
or money's worth.
Exception: In case of bona fide sale for an
adequate and full consideration in money or
money’s worth.
Amount to be included in the GE:
The excess of the fair market value (FMV), at
the time of death, of the property otherwise to
be included on account of such transaction,
over the value of the consideration received
therefore by the decedent.
Formula:
FMV (at the time of death) less value
received
7. PRIOR INTEREST
– All transfers, trusts, estates, interests,
rights, powers and relinquishment of powers
made, created, arising, existing, exercised or
relinquished before or after the effectivity of
the Tax Code.
Doctrine of Three-year Presumption
 The law does not specify the number of years
prior to decedent’s death within which a
transfer can be considered in contemplation
death. (BIR Ruling No. 261, September 2,
1987) But in Sec. 85(B), January 1, 1998,
there is a presumption of relinquishment of
power to transfer if made within three years
prior to the death of the decedent.
 When doctrine applies:
a. When it is admitted or shown that the
transfer have been made in
contemplation of death; or
b. Where it is made 1) within 3 years prior
to the death of the decedent 2) without
full and adequate consideration and 3) it
affects the interest(s) of any one
beneficiary of a value at the time of such
death in excess of Php2,000 then to the
extent of such excess, It may however be
shown that the relinquishment was not in
contemplation of death (Sec. 85[3]).
EXEMPTION OF CERTAIN ACQUISITIONS
AND TRANSMISSIONS (Sec. 87)
1. the merger of usufruct of the owner of the
naked title;
2. the transmission or delivery of the inheritance
or legacy of the fiduciary heir or legatee to the
fideicommissary;
3. the transmission from the first heir, legatee or
donee in favor of another beneficiary, in
accordance with the will of the predecessor;
 88 |TAXATION LAW REVIEWER
4. all bequests, devises, legacies, or transfers to
social welfare, cultural and charitable
institutions no part of the net income of which
inures to the benefit of any individual;
provided that not more that 30% of said
bequests, legacies or transfers shall be used
by such institutions for administration
purposes. (Sec. 87, NIRC)
Illustration:
W for life
G Tee MERGER
S Q. H and W opened a joint savings account with
 G (grantor) is subject to donor’s tax
 W is subject to income tax
 Transmission of full ownership to S is tax
exempt.
 T (trustee)
RULES OF VALUATION
 FMV of all properties as of the time of death
(Sec. 88, NIRC)
 Real property- higher value between the FMV
determined by the CIR and the FMV as shown
in the schedule of values fixed by the
Provincial and City Assessors
 Personal Property recently acquired-purchase
price may indicate FMV
 Shares of stocks- the FMV will depend on
whether or not the shares are traded in
the stock exchange
 Traded shares- arithmetic mean between
highest and lowest quotation
 Unlisted shares:
Common shares-Book Value
Preferred shares-Par value
Q. In determining the net value of the estate, is it
proper to deduct the compensation due to
trustees?
A. A trustee is entitled to receive a fair
compensation for his services. But it does not
follow that his compensation may be deducted
in arriving at the net value of the estate. There
is no statute which requires trustees’
commission to be deducted. Though a
testamentary trust has been created, it does
not appear that the testator intended that the
duties of his executors and trustees should be
separated. The compensation of a trustee
earned not in the administration of the estate
but in the management thereof for the benefit
of the legates or devises, does not come
properly within the class for exempting
administration expenses. Trust is created for
the benefit of those to whom the property
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
ultimately passes (Lorenzo vs. Posadas, G.R.
No. L-43082, June 18, 1937).
Q. Do funds deposited in a joint saving account
subject to survivorship agreement form part of
the gross estate of the decedent (“Husband
and/or Wife Account”)?
A. The funds are considered the exclusive property
of the surviving spouse. The survivorship
agreement not having been executed for an
unlawful purpose, its “winner-takes-all”
feature is permitted by the Civil Code which
considers the same as a mere obligation with a
term. Being the separate property of the wife,
they form no part of the estate of the decease
spouse.
Metro Bank. In 2008 H died. Is W required to
include the money in the joint savings account
in the gross estate of H subjects to estate tax?
A. Yes. One-half (1/2) of the money in the joint
account should be included in the gross estate
of H because that belongs to H and the
remaining half belongs to W. A joint account is
different from a survivor’s account or
commonly referred to as the “and/or” account.
If H and W maintained this kind of account in
the bank, W need not report half of the money
in the said account for estate tax purpose.
DEDUCTIONS FROM ESTATE
A. For RESIDENT ALIENS AND CITIZENS
1. Expenses, Losses, Indebtedness, Taxes,
etc. (ELIT)
a. funeral expenses;
b. judicial expenses;
c. claims against estate;
d. claims against insolvent persons;
e. unpaid mortgages;
f. taxes;
g. casualty losses
2. Transfers for Public Use;
3. Vanishing Deduction;
4. Family Home;
5. Standard Deduction of P1 million;
6. Medical Expenses;
7. Amounts Received by Heirs under R.A.
4917 (Retirement Benefits)
8. Share of Surviving Spouse in Conjugal or
Community Property.
B. For NON-RESIDENT ALIEN-DECEDENT
(V-USE)
1. Expenses, Losses, Indebtedness, Taxes
(ELIT)
2. Transfers for Public Use;
3. Vanishing Deduction;
4. Share of Surviving Spouse in Conjugal or
Community Property

I. FUNERAL EXPENSES
Actual funeral expenses or 5% of the gross
estate; or P200,000, whichever is lowest.
Requisites for deductibility:
1. incurred up to the time of interment;
2. not borne or defrayed by relatives and friends;
3. supported by receipts or invoices or other
evidence.
Actual funeral expenses not confined to its
ordinary or usual meaning. They include:
a. mourning apparel of the surviving spouse and
unmarried minor children of the deceases
bought and used on occasion of the burial;
b. expenses for the deceased’s wake, including
food and drinks;
c. publication charges for death notices;
d. telecommunication expenses incurred in
informing relatives of the deceased;
e. cost of burial plot, tombstones, monument or
mausoleum but not their upkeep. In case the
deceased own a family estate or several burial
lots, only the value corresponding to the plot
where he is buried is deductible;
f. interment and/or cremation fees and charges;
and
g. all other expenses incurred for the
performance of the rites and ceremonies
incident to interment. (RR No. 2- 2003)
NOTE: Expenses included in R.R. No. 2-2003 refer
to those incurred before and during the burial.
Expenses incurred after the interment, such as for
prayers, masses, entertainment, or the like are not
deductible. Any portion of the funeral and burial
expenses borne or defrayed by relatives and
friends of the deceased are not deductible.
II. JUDICIAL EXPENSES
Refer to the expenses incurred in the
testamentary or intestate proceedings for the
settlement of the estate. It includes those
incurred during the settlement of the estate
but not beyond the last day prescribed by law,
or the extension thereof, for the filing of the
estate tax return (six months after death).
Requisites for deductibility:
a. incurred during the settlement of the estate
b. incurred not beyond the last day prescribed
by or the extension thereof, for the filing of
estate tax return
c. incurred for the benefit of the estate
d. supported by receipts or invoices or by a
sworn statement of account issued and
signed by the creditor
Those incurred in the:
1. inventory taking of assets comprising the
gross estate;
89
2.1. their administration;
3.1. the payment of debts of the estate;
4.1. the distribution of the estate among the
heirs
Judicial expenses may include the following:
1. fees of executor or administrator
2. attorney’s fees
3. court fees
4. appraiser’s fee
5. clerk hire
6. costs of preserving and distributing the estate
7. costs of storing or maintaining property of the
estate; and
8. brokerage fees for selling property of the
estate.
Q: May the notarial fee paid for the extrajudicial
settlement and the attorney’s fees in the
guardianship proceedings be allowed as
deductions from the gross estate of decedent in
order to arrive at the value of the net estate?
A: Yes. These are considered as judicial expenses,
which are in effect expenses of administration.
Administration expenses, as an allowable
deduction from the gross estate of the decedent,
are construed to include all expenses essential to
the collection of assets, payment of debts, or
distribution of property to the persons entitled
thereto. (CIR vs. CA and Pajonar, G.R.. No.
123206, March 22, 2000)
III. CLAIMS AGAINST THE ESTATE
These are debts or demands of a pecuniary
nature which could have been enforced against
the deceased in his lifetime and could have
been reduced to simple money judgments.
Requisites for deductibility:
1. the liability represents a personal obligation
of the deceased existing at the time of his
death except unpaid obligations incurred
incident to his death;
2. it was contracted in good faith and for
adequate and full consideration in money or
money’s worth;
3. the claim must be valid in law and enforceable
in court;
4. the indebtedness must not have been
condoned by the creditor or the action to
collect must not have been prescribed.
5. the debt instrument must be notarized;
6. if the loan was contracted within three (3)
years before the death of the decedent, the
administrator or executor shall submit a
statement under oath showing the disposition
of the proceeds of the loan.
For estate tax purposes, the actual claims of
creditors may be fully allowed as deductions from
gross estate despite the fact that said claims were
reduced or condoned through compromise
agreements entered into by the estate with its
creditors.
 90 |TAXATION LAW REVIEWER
There is no law, nor any legislative intent in the
tax laws, which disregards the date-of-death
valuation principle and particularly provides
that post-death developments and particularly
provides that post-death developments must be
considered in determining the net value of the
estate.
Moreover, the term “claims” required to be
presented against a decedent’s estate is generally
construed to mean debts or demands of a
pecuniary nature which could have been enforced
against the deceased in his lifetime or liability
contracted by the deceased before his death.
Therefore, the claims existing at the time of
death are significant to, and should be made the
basis of the determination of allowable
deductions. (Rafael Arsenio S. Dizon vs. CTA, et
al., G.R. No. 140944, May 6, 2008)
IV. CLAIMS AGAINST INSOLVENT PERSONS
1. The amount of said claims has been
initially included as part of the GE;
2. The incapacity of the debtors to pay their
obligations is proven, not merely alleged.
V. UNPAID MORTGAGES INCLUDE:
1. The value of the property mortgaged to the
extent of the decedent’s interest therein,
undiminished by such mortgage or
indebtedness, is included in the GE;
2. The indebtedness must have been
contracted bona fide and for an adequate
and full consideration in money or money’s
worth;
3. Verification must be made as to who was
the beneficiary of the loan proceeds.
4. If found to be merely an accommodation
loan, the value of the unpaid loan must be
included as a receivable of the estate.
5. If there is a legal impediment to recognize
the same as receivable, said unpaid
mortgage shall not be allowed as a
deduction.
VI. TAXES
These include those taxes that accrued as of
the death of the decedent AND unpaid as of
the time of death.
The following are not deductible:
1. income tax on income received after the death
of the decedent;
2. property taxes not accrued after death;
3. estate tax
VII. LOSSES
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
Requisites for deductibility:
1. arose from fire, storm, shipwreck or other
casualty, robbery, theft or embezzlement;
2. not compensated by insurance or otherwise;
3. not claimed as deduction in an income tax
return of the taxable estate;
4. incurred during the settlement of the estate;
5. incurred before the last day for the payment
of the estate tax (six months after the
decedent’s death)
A casualty loss to estate property during the
period of administration gives rise not only to a
deduction from the gross estate for estate tax
purposes but also a deduction from the gross
income in determining the taxable income of the
estate which is under judicial settlement.
However, the estate cannot claim the deduction
for both purposes. It can either choose to deduct
such losses from the gross income or from the
gross estate for purposes of the estate tax.
VIII. VANISHING DEDUCTIONS/PROPERTY
PREVIOUSLY TAXED
It operates to ease the harshness of
successive taxation of the same property
within a relatively short period of time (up
to 5 years) occasioned by the untimely death
of the transferee.
In effect, it reduces his gross estate tax.
Requisites (DIP-IN)
1. Death - the present decedent died within
five years from transfer of the property
from a prior decedent;
2. Inclusion of the property - the property
formed part of the GE located in the
Philippines of the prior decedent, or of the
taxable gift of the donor within 5 years
prior to the present decedent’s death;
3. Previous taxation of the property - the
estate tax or donor’s tax on the gift must
have been finally determined and paid;
4. Identity of the property - the property
must be identified as the one received from
the prior decedent, or something acquired
in exchange therefore; and
5. No previous vanishing deduction on the
property was allowed to the estate of the
prior decedent.
Limitations as to amount of deduction allowable:
a. Value of property – limited by the value of the
property previously taxed as finally
determined for the purpose of the prior
transfer tax or the value of the property in the
present decedent’s GE, whichever is lower
b. Deduction for mortgage or other lien – the
initial value in (a) above shall be reduced by
the total amount paid, if any, by the present
 91

decedent on any mortgage or other lien on the
property
c. Deduction for ELIT and TPU – the value as
reduced in (b) above shall be further reduced
by an amount which bears the ratio to the
amounts allowed as deductions for ELIT and
TPU (Transfer for Public Use) as the amount
otherwise deductible for property previously
taxed bears to the value of the decedent’s GE.
d. Percentage of deductions
If the present decedent died within the following
period after the date of prior decedent’s death or
after the date of donation, the vanishing deduction
shall be the value in (c) multiplied by the following
rates:
characterized by permanency, that is, the place
to which, whenever absent for business or
pleasure, one still intends to return (domicile).
Requisites:
1. said family home must be the actual
residential home of the decedent and his
family at the time of his death;
2. said fact must be certified to by the
barangay captain of the locality where it is
located;
3. the total value of the family home must be
included as part of the GE of the decedent;
and
4. the amount deductible is the current FMV
but not to exceed 1 million pesos

More than But not more Rate NOTE: A person may constitute only one
than family home.
- 1 yr 100%
1 yr 2 yrs 80% XI. STANDARD DEDUCTION
2 yrs 3 yrs 60%  1 million pesos
3 yrs 4 yrs 40%  Without need of substantiation
4 yrs 5 yrs 20%
5 yrs - 0% XII. MEDICAL EXPENSES

Format of computation: Requisites:

Value Taken 1. incurred within one year prior to death of
Less: Mortgage paid by present decedent, the decedent;
if any 2. duly substantiated with receipts for
services rendered by the decedent’s
Initial Basis
attending physicians, invoices,
Less: Proportionate deductions:
statements of account duly certified by
the hospital and such other supporting
Initial basis X (ELIT+ TPU)
documents; and
Gross Estate
3. for a maximum amount of P500,000
Final Basis
X Rate of Vanishing Deduction
NOTE: Approval of the court where a
Vanishing Deduction
probate/intestate proceeding is pending is not
a mandatory requirement in the collection of
IX. TRANSFER FOR PUBLIC USE estate taxes. On the contrary, the
probate/intestate court is prohibited from
Requisites: delivering any distributive share to any party
1. the disposition is in a last will and unless there is certification from the
testament; Commissioner that the estate taxes are
2. to take effect after death; already paid.
3. in favor of the government of the
Philippines or any political subdivision XIII. AMOUNT RECEIVED BY HEIRS UNDER
thereof; and REPUBLIC ACT NO. 4917
4. for exclusively public purpose
Any amount received by the heirs from the
NOTE: This should also include bequests, devices, decedent’s employer as a consequence of the
or transfers to social welfare, cultural and death of the decedent employee in
charitable institutions. accordance with R.A. 4917 is allowed as a
deduction provided that the amount of the
separation benefit is included as part of the
gross estate of the decedent.
X. FAMILY HOME
XIV. NET SHARE OF THE SURVIVING
The dwelling house including the land on SPOUSE IN THE CONJUGAL
which it is situated, where the husband and PARTNERSHIP OR COMMUNITY
wife, or head of the family and members of PROPERTY
their family reside, as certified to by the
Barangay Captain of the locality. It is
 92 |TAXATION LAW REVIEWER
After deducting the allowable deductions
appertaining to the conjugal or community
properties included in the gross estate, the
share of the surviving spouse must be
removed to ensure that only the decedent’s
interest in the estate is taxed.
EXCLUSIONS FROM ESTATE
a. Real, personal and intangible personal
properties belonging to a non- resident
decedent located outside of the Philippines.
b. Proceeds of life insurance if payable to a
designated beneficiary under an irrevocable
policy.
c. Property held in trust or in fiduciary capacity
for others.
d. Property belonging exclusively to the surviving
spouse (capital of the husband or paraphernal
property of the wife).
TAX CREDIT FOR ESTATE TAXES
PAID IN A FOREIGN COUNTRY
General Rule: The estate tax shall be credited with
the amounts of any estate tax imposed by the
foreign country.
Limitations:
a. For estate taxes paid to one foreign country
The amount of the credit in respect to the tax
paid to any country shall not exceed the same
proportion of the tax against which such
credit is taken, which the decedent’s net
estate situated within such country taxable
under the NIRC bears his entire net estate.
Tax Credit Limit:
Net Estate, Foreign Philippine
X
Entire Net Estate Estate Tax Due
b. For estate taxes paid to two or more foreign
countries
 The total amount of the credit shall not
exceed the same proportion of the tax
against which such credit is taken,
which the decedent’s net estate situated
outside the Philippines taxable under the
NIRC bears to his entire net estate.
Entire Tax Credit Limit:
Net Estate outside the Philippine
X
Phils. Estate Tax Due
Entire Net Estate
EXEMPTION OF CERTAIN
ACQUISITIONS AND TRANSMISSIONS
a. The first Php200,000.00 of the gross estate
b. Retirement benefits of employees of private
firms from private pension plan approved by
the BIR
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
c. Intangible personal property of non-resident
decedent under the Principle of Reciprocity
d. Amount received for war damages
e. Amount received from the US Veterans
Administration
f. Proceeds of life insurance and benefits
received by members of the GSIS and SSS.
FILING OF NOTICE OF DEATH
 Notice of Death should be filed in all cases of
transfers subject to tax or exempt but the
gross value of the estate exceeds twenty
thousand pesos (P20,000).
 The executor, administrator or any of the
legal heirs, as the case may be, within two (2)
months after the decedent's death, or within a
like period after qualifying as such executor or
administrator, shall give a written notice
thereof to the Commissioner.
ESTATE TAX RETURN
A return which is filed within six (6) months from
the decedent's death.
Extension of time to file: The Commissioner or any
Revenue Officer shall have authority to grant, in
meritorious cases, a reasonable extension not
exceeding thirty (30) days for filing the return.
An estate tax return is required to be filed:
1. When the estate is subject to estate tax;
2. When the estate is not subject to estate tax
but the gross estate exceeds P200,000;
3. Regardless of the amount of the gross estate,
where the gross estate consists of registered
or registrable property such as motor vehicle
or shares of stock or other similar property for
which a clearance from the BIR is required as
a condition precedent for the transfer of
ownership thereof in the name of the
transferee. (Sec 90)
NOTE: When the gross estate exceeds P2M, the
estate tax return shall be supported with a
statement duly certified by a Certified Public
Accountant (CPA) stating:
1. The itemized assets of the decedent with its
corresponding gross value at the time of his
death, or in the case of a non-resident, not
citizen of the Philippines, that part of his
gross estate situated in the Philippines;
2. The itemized deductions from the gross
estate;
3. The amount of tax due, whether paid or still
due and outstanding.
Where to file:

a. Resident decedent: accredited agent bank, or
Revenue District Officer, Collection Officer, or
duly authorized Treasurer of the city or
municipality in which the decedent was
domiciled at the time of his death or if there
be no legal residence in the Philippines, with
the Office of the Commissioner.
b. Non-resident decedent: the Revenue District
Office (RDO) where the executor or
administrator is registered
a. if not registered, with the RDO having
jurisdiction over the executor or
administrator’s legal residence
b. if there is no executor or administrator,
with the Office of the Commissioner
Payment of Estate Tax
General Rule: at the time the return is filed (pay-
as-you-file)
Exception: When the Commissioner finds that the
payment on the due date of the estate tax or of any
part thereof would impose undue hardship upon
the estate or any of the heirs he may extend the
time for payment of such tax or any part thereof
 not to exceed five (5) years, in case the estate
is settled through the courts,
 or two (2) years in case the estate is settled
extrajudicially
NOTE:
The executor, administrator or beneficiary, as the
case may be, is required to furnish a bond in such
amount not exceeding double the amount of tax
and with such sureties as the Commissioner
deems necessary.
The CIR shall deny the application for extension
where the request for extension is by reason of:
 negligence,
 intentional disregard of rules and regulations,
 or fraud on the part of the taxpayer,
Liability for Payment
1. Primarily liable: the executor or
administrator before distributing the net
estate to the heirs
2. Subsidiarily liable: the heir or beneficiary to
the extent of his share in the inheritance
3. The liability of 2 or more executors of
administrators shall be several.
Discharge of Executor or Administrator from
Personal Liability
The executor or administrator, upon payment of
the amount of which he is notified by the CIR upon
prior application therefrom, shall be discharged
from personal liability for any deficiency in the
tax thereafter found to be due and shall be entitled
to a receipt or writing showing such discharge.
93
Deficiency means
1. The amount by which the tax imposed exceeds
the amount shown as the tax by the executor,
administrator, or any of the heirs upon his
return; but the amounts so shown on the return
shall first be increased by the amounts
previously assessed (or collected without
assessment) as a deficiency and decreased by
the amount previously abated, refunded or
otherwise repaid in respect of such tax; or
2. If no amount is shown as the tax by the
executor, administrator, or any of the heirs
upon his return, or if no return is made by the
executor, administrator, or any heir, then the
amount by which the tax exceeds the amounts
previously assessed (or collected without
assessment) as a deficiency; but such amounts
previously assessed or collected without
assessment shall first be decreased by the
amounts previously abated, refunded or
otherwise repaid in respect of such tax.
DONOR’S TAX
Donor’s tax is not a property tax, but is a tax
imposed on the transfer of property by way of gift
inter vivos.
It is a valid transfer of property from one person
to another without compensation or consideration
therefore (Prentice Hall Federal Tax Course).
 The donor’s tax law was enacted not only to
prevent estate tax avoidance, but also to
prevent income tax avoidance by reducing
yearly income and thereby escaping the effect
of the progressive rates of the income tax
(Smith vs. Shaughnessy, 318 US 176).
 Gift tax is not a property tax but an excise tax
imposed on the privilege of the owner to give.
It is not a tax on property as such because the
imposition does not rest upon general
ownership. (Bromley vs. McCaughn, 280 U.S.
124)
NOTE: The spouses are co-owners of conjugal
property. (Art. 174, Civil Code) Thus, a gift
made by the spouses of conjugal property shall
be deemed separate donations by the husband
and the wife in proportion to their respective
interests. In other words, there will be two
donations made and two separate
computations of donor’s taxes. (Tang Ho vs.
Board of Tax Appeals, 97 Phil. 889)
BASIC PRINCIPLES
 It does not apply unless and until there is a
completed gift.
 The transfer is perfected from the moment the
donor knows of the acceptance of the donee.
 94 |TAXATION LAW REVIEWER
 It is completed by the delivery of the donated
property, either actual or constructive.
 Renunciation by the surviving spouse of his/her
share in the conjugal partnership or absolute
community after the dissolution of the
marriage is subject to donor’s tax.
 General renunciation by an heir, including the
surviving spouse, of his/her share in the
hereditary estate is not subject to tax, unless
specifically and categorically donee in favor of
identified heir/s to the exclusion or
disadvantage of the other co-heirs in the
hereditary estate
. 2. Sales and exchanges if the consideration
 The donation of a movable may be made orally
or in writing. An oral donation requires the
simultaneous delivery of the thing or of the
document representing the right donated.
 If the value of the personal property donated
exceeds Php5,000.00, the donation and the
acceptance shall be made in writing. Otherwise
the donation shall be void (Art.748, Civil Code).
 In order that donation of immovable may be
valid, it must be made in a public document
specifying therein the property donated and
the value of the charges which the donee must
satisfy.
 The acceptance may be made in the same deed
of donation or in a separate public instrument
but it shall not take effect unless it is done
during the lifetime of the donor. And if
accepted in a separate instrument, the donor
shall be notified thereof in authentic form and
this step shall be noted in both instruments
(Art.749, Civil Code).
 The donor and the donee must have the
capacity to donate and accept donation
respectively.
 All persons who may contract and dispose of
their property may make a donation. But the
donee, unlike the donor, need not be
capacitated. Minors and others who cannot
enter into a contract may become donees. The
acceptance, however, shall be done through
their parents or legal representatives.
 Donations may even be made to conceived and
unborn children and the same may be accepted
by those persons who would legally represent
them if they were already born.
 Under the Tax Code however, donation has a
broader meaning. It extends to sales or
exchanges for less than adequate and full
consideration in money or money’s worth (Sec.
100, NIRC).
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
 Donative intent is not, however, required in
transfers of property for less than adequate
and full consideration. In such a case, donative
intent is superfluous. (Perez vs. Commissioner,
CTA Case 1707, Feb. 10, 1909).
 If the value of the personal property donated
exceeds Php5, 000.00, the donation and
acceptance shall be made in writing.
Otherwise, the donation is void and therefore
not taxable.
Q. What constitutes a gift for gift tax purposes?
A.
1. Transfer of property without consideration
(direct donation)-with donative intent.
received is lower than the FMV of the
property transferred (indirect or deemed
gift).
 The amount of donation is the
difference between the consideration
received and FMV of property
transferred.
 No deemed gift if property
transferred is a real property subject to
6% capital gains tax
“CONSIDERATION”
Means that when the transferor gives something
away and does not at the same time replace it with
money of equal value or some goods or services
capable of being valuated in money, he is deemed
to have made a gift within the taxing law
(Commissioner vs. Bristol, 121 F(2d) 129).
 Consideration must be measurable in money
or money’s worth. Mere legal consideration is
not sufficient.
 The consideration must flow to the donor;
mere detriment to the done does not satisfy
the purpose of the statute.
Q. When does gift occur?
A. A gift occurs when the donor surrenders
CONTROL over the property. If the donor
retains unlimited power to revoke a gift, no gift
has occurred. If the donor does not relinquish
control over the property during his lifetime
(i.e. right of possession, enjoyment, income),
the donation is a donation mortis causa subject
to the estate tax.
REQUISITES OF VALID DONATION
(CIDA)
1. capacity of the donor to make donation;
2. donative intent or intent to make a gift on the
part of the donor;
3. delivery, whether actual or constructive; and
4. acceptance of the gift by the done.
Donation for Political Purposes
 95

In the case of Cruz vs. CIR, G.R. No. 120721,
February 23, 2005, it was held that political or
electoral contributions are considered gifts under
NIRC and are therefore subject to donor’s tax.
 Under the Omnibus Election Code, donations
or any contribution in cash or in kind to any
candidate form an elective position, political
party or coalition of parties for campaign
purposes is not subject to donor’s tax provided
that the donor and the donee comply with the
requirements of filing tax returns of
contributions with the Comelec [Sec. 99(c) of
the Tax Code]
 Donations in kind to politicians, political
parties are subject to 5% withholding tax.
Q. Why is inheritance that has been renounced
for purposes of donor’s tax exempt?
A. When one of the heirs renounces his share, the
sane becomes the property of the person to
whom the benefit is given and is additional
inheritance of the latter and not donation
from the former. Nothing is received by the
heir who makes a renunciation of his share
(BIR Ruling 65-092)
children, and therefore, donation to him shall not
be considered as donation made to stranger.
Donations made between business organizations
and those made between an individual and a
business organization shall be considered as
donation made to a stranger.
Intangible Personal Properties with Situs in the
Philippines - same in estate tax subject to the
reciprocity rule
TRANSFERS WHICH MAY BE CONSTITUTED
AS DONATION
a. Sale/exchange/transfer of property for
insufficient consideration
A sale, exchange or transfer of property for less
than an adequate and full consideration
constitutes an indirect gift to the extent of the
difference where there is no donative intent to
make a gift except in transfers involving real
property classified as capital asset. Where the
consideration or selling price is fictitious in a
Deed of Sale, the entire value of the property
transferred shall be subject to donor’s tax.

Tax basis In a sale where the purchase price is payable

The tax for each calendar year shall be computed in installments at a certain rate of interests,
on the basis of the total net gifts made during the the difference between the purchase price
calendar year in accordance with schedule of tax agreed upon by the parties and the fair market
rates prescribed in the law. (Sec. 99 (A), NIRC) value of the property when the purchase was
paid in full is not subject to donor’s tax.
Donor’s Tax Rates
Over But Tax Plus Excess Example: S sold to B a property considered as
Not shall Over ordinary asset for Php200,000.00 which has a
Over be fair market value of Php750,000.00. There is a
- 100K Exempt - - donation of Php.550,000.00 which is subject to
100K 200K 0 2% 100k donor’s tax
200K 500K 2K 4% 200K
500K 1M 14K 6% 500K b. Condonation/Remission of Debt
1M 3M 44K 8% 1M The cancellation and condonation of
3M 5M 204K 10% 3M indebtedness may amount to: a) payment of
5M 10M 404K 12% 5M income tax; b) of donor’s tax; or c) of a capital
10M - 1,004K 15% 10M transaction.

i. If an individual performs services to the

NOTE: When the donee or beneficiary is a
stranger, the tax payable by the donor shall be
thirty percent (30%) of the net gifts.
STRANGER - A person who is not a:
1. brother, sister (whether by whole or haif
blood), spouse, ancestor, and lineal
descendant; or
2. a relative by consanguinity in the collateral
within the 4th civil degree
NOTES:
A legally adopted child is entitled to all the rights
and obligations provided by law to legitimate
creditor, who in consideration thereof
cancels the debt, income to that amount is
realized by the debtor as compensation for
his services. Thus, he has realized
compensation income subject to income
tax.
ii. If, however, a creditor merely desires to
benefit the debtor and without any
consideration or exchange of service
thereof cancels the debt, the amount of the
debt so cancelled is a gift from the creditor
to the debtor. To the debtor, this is not a
gift given out of pure liberality or
generosity. It started out as an obligation
on his part and when condoned to him such
is a remuneratory donation subject to
 96 |TAXATION LAW REVIEWER
income tax. The creditor on the other hand,
shall be subject to donor’s tax if the
amount of debt condoned exceeds
Php100,000.00.
iii. If a corporation to which a stockholder is
indebted condones the debt, the
transaction has the effect of payment of a
cash dividend in advance. This is a capital
transaction. (Sec. 50, rev. Reg. No.2)
Other Transactions Covered by Donor’s Tax:
a. Remuneratory donations
b. Condonations of debt
c. Sale of ordinary assets for insufficient
consideration
d. Creation of an irrevocable trust
Under the enumeration above, donative
intent is not necessary because there are some
instances where donor’s tax is imposed
notwithstanding the absence of donative
intent. Such as, where the property, other
than real property classified as capital assets,
is transferred for less than an adequate and
full consideration in money or money’s worth,
then the amount by which the FMV of the
property exceeded the value of the
consideration shall, for the purpose of the
donor’s tax, be deemed a gift, and shall be
included in computing the amount of gifts
made during the calendar year.
TRANSFER FOR LESS THAN
ADEQUATE AND FULL CONSIDERATION
General Rule: Where property is transferred for
less than an adequate and full consideration.
Exception: Transfer of real property classified as
capital assets are subject to capital gains tax.
NET GIFTS
These refer to the economic benefit that accrues to
the donee.
 If a done will be given a property he will be
required to assume the mortgage thereon, the
net gift would be the difference between the
FMV of the property donated minus the
mortgage assumed.
 Tax Base-Cumulative net gifts during the
calendar year
Amount included in the Net Gift:
 The excess of the FMV of the property over the
consideration received shall be deemed a gift.
 Some sales of property may be undervalued
intentionally or inadvertently by the parties
thereof. In such situation, the difference
between the true value of the property and the
consideration reflected in the sale will be
considered as a donation. ( Perez vs. Comm.,
CTA Case No. 1707, February 10, 1909)
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
DETERMINATION OF GROSS GIFT
a. For a resident donor-Real properties, tangible
and intangible personal properties wherever
located.
b. For a non-resident donor- Real properties,
tangible or intangible properties located in the
Philippines.
COMPOSITION OF GROSS GIFT
Only properties upon which the donor divests
himself of CONTROL during his lifetime.
a. Real, intangible and tangible personal
properties, or mixed located in the
Philippines, and outside the Philippines,
depending on the kind of donor,
b. Franchise which must be exercised in the
Philippines
c. Shares, obligations or bonds issued by any
corporation or sociedad anonima organized in
the Philippines in accordance with our laws.
d. Shares, obligations or bonds issued by any
foreign corporation, 85% of the business of
which is located in the Philippines.
e. Shares, obligations or bonds issued by any
foreign corporation if such shares, obligations
or bonds have acquired a business situs in the
Philippines.
f. Shares or rights in any partnership, business
or industry established in the Philippines.
Properties subject to donor’s tax when donated:
a. Real and personal property, whether tangible
or intangible, or mixed wherever situated,
where the donor is a resident or citizen of the
Philippines at the time of the donation and
b. Real and personal property whether tangible
or intangible, situated in the Philippines
where the donor is a non-resident alien at the
time of the donation
Excluded: Real and personal property situated
outside the Philippines where the donor is a non-
resident alien at the time of the donation.
Rule on intangible properties owned by a non-
resident (not a citizen) donor:
General Rule: intangible personal property
located in the Philippines belonging to a non-
resident donor, who is not a citizen of the
Philippines, is included in the gross gift under the
“Reciprocity Clause”
Except:
a. If the donor at the time of the donation was a
resident of a foreign country which at the time
of giving the gift did not impose a transfer tax
of any character in respect of intangible

personal property of citizens of Philippines not
residing in that foreign country; or
b. If the laws of the foreign country of which the
donor was resident at the time of donation
allow a similar exemption from transfer taxes
of very character in respect of intangible
personal property owned by citizens of the
Philippines nit residing in that foreign country.
Q.
a. X, a non-resident citizen, donated a
property abroad worth 200K to a relative
here (resident citizen). Is the donation
taxable?
b. X, a non-resident alien, donated a property
worth 200K and located in the Philippines
to a done abroad. Is the donation taxable?
c. X, a resident alien, donated shares of stocks
of a domestic corporation worth 200K to his
brother abroad who is getting married in
two (2) months from date of donation. Is the
donation taxable?
d. X, a resident citizen, gave a wedding ring
(a set of computer valued at 75K) to his
legitimate daughter on account of her
marriage within the taxable period. Is the
gift subject to Dowry deduction?
e. Are corporations subject to donor’s tax?
A.
a. The donation is taxable. X, a NRC is
taxed on all donations made within or
without the Philippines, if the gift given
is more than 100K.
b. The donation is taxable. X, a NRA is
taxed on any donation located in the
Philippines, if the value of the gift is more
than 100K.
c. The donation is taxable, shares of stocks
of a domestic corporation are considered
property located in the Philippines.
Whoever is the donor, if the value
donated is more than 100K, it is taxable.
d. No. The gift is not subject to dowry
deduction, because the gift is exempt
from donor’s tax. (WHY? Less than 100K)
If the value of the gift is more than 100K,
then, the dowry deduction of 10K is
applicable.
e. Yes. Corporations are also subject to gift
tax. They are considered gifts to
strangers; hence the tax rate is 30%.
VALUATION OF GIFTS MADE IN PROPERTY
a. Personal property-The FMV thereof at the time
of the gift is considered the amount of the gift.
b. Shares of Stock
1. If listed in the stock exchange- The average
(mean) of the highest quoted price and the
lowest quoted price at the date of the
donation or the date nearest to the date of
donation.
97
2. If not listed in the stock exchange- The
book value of the stock at the date of
donation or the date nearest thereto.
c. Real property- The current and FMV thereof
as determined by the CIR or the FMV as
shown in the schedule of values fixed by
provincial or city assessor, whichever is
higher, is considered as the FMV as in the
case of the estate tax.
d. Money- The amount thereof is the valuation.
TAX CREDIT FOR DONOR’S TAXES PAID IN A
FOREIGN COUNTRY
Rule: The donor’s tax imposed by the Tax Code
upon a donor who was a citizen or a resident at the
time of donation shall be credited with the amount
of any donor’s taxes imposed by the foreign
country.
Limitations:
a. For donor’s tax paid to one foreign country
The amount of the credit in respect to the tax
paid to any country shall not exceed the same
proportion of the tax against which such
credit is taken, which the net gifts situated
within such country taxable under the NIRC
bears his entire net gift.
Tax Credit Limit:
Net Gifts in a foreign Philippine
country X Donor’s Tax
Entire Net Gifts Due
b. For donor’s taxes paid to two or more foreign
countries
The total amount to the credit shall not exceed
the same proportion of the tax against which
such credit is taken, which the net gifts
situated outside the Philippines taxable
under the NIRC bears to this entire net gifts.
Entire Tax Credit Limit:
Net Gifts Outside the Philippine
Phils. X Donor’s Tax
Entire Net Gifts Due
EXEMPTIONS OF GIFTS FROM DONOR’S TAX
Exemptions under the Tax Code:
1. Gifts made by a resident:
a. dowries
 gifts on account of marriage
 before its celebration or
 within one year thereafter by parents
to each of their legitimate,
illegitimate or adopted children
 to the extent of the first P10,000
b. gifts made for the use of the national
government or any entity created by any
of its agencies which is not conducted for
profit, or to any political subdivision of
said government;
 98 |TAXATION LAW REVIEWER
c. gifts in favor of educational, charitable,
religious, cultural or social welfare
corporation, institution, foundations,
trust or philanthropic organization,
research institutions or organizations,
accredited NGO, provided that not more
than 30% of said gift shall be used by such
donee for administrative purposes
(can be deleted)
Requirements:
a. not more than thirty percent (30%) of
the said gift should be used for
administrative purposes;
b. the donee must be a non-stock, non-
profit organization or institution;
c. the donee organization or institution
should be governed by trustees who do
not receive any compensation;
d. the said donee should not be
authorized to receive dividends; and
e. said donee denotes all its income to
the accomplishments and promotion
of its purposes.
2. Gifts made by a non-resident alien:
Only gifts mentioned in letters (b) and (c) are
exempt.
Exemptions under Special Laws:
1. donations to Philippine government for
scientific, engineering and technological
research, invention and development (R.A.
1606)
2. donations to social welfare, cultural, and
charitable organizations (P.D. 507; R.A. 1916)
3. donations to the International Rice Research
institute (R.A. 2707)
4. donations to Ramon Magsaysay Award
Foundation (R.A. 3076)
5. donations to the National Museum, the
National Library and the archives of the
National Historical Institute (P.D. 373)
6. donations to the Southern Philippines
Development Administration (P.D. 690)
7. donations to the Intramuros Administration
(P.D. 1616)
8. donations to Development Academy of the
Philippines (DAP)
9. donations to Integrated Bar of the Philippines
(IBP)
ALLOWABLE DEDUCTIONS FROM GROSS
GIFT:
The tax code imposes the donor’s tax on net gifts,
implying that from the gross gifts are allowable
deductions. Nowhere in the law on donation is
there a provision entitled “ Deductions from gross
gifts”. – What the law has is a provision entitled
“Exemptions on certain gifts”. These exemptions
should be taken to mean the deductions allowed by
law to arrive at the taxable net gifts.
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
NOTE: Deductions from gross gift will depend on
the classification of the DONOR.
For resident or citizen donor and non-resident not
a citizen donor (RC/NRC/RA/NRA)
a. Gifts made to or for the use of the National
Government or any entity created by any of its
agencies which is not conducted for profit.
b. Gifts in favor of educational and/or charitable
and/or Religious Corporation, institution,
foundation, trust, or philanthropic
organization or research institution or
organization. Provided, however, that not
more than 30% of said gift shall be used by
such donee for administration purposes.
 These organizations/institutions may be
a school, college or university and/or
charitable corporation incorporated as a
non-stock entity, paying no dividends,
governed by trustees who receive no
compensation, and devoting all its
income, whether students’ fees or gifts,
donations, subsidies or other forms of
philanthropy to the accomplishment and
promotion of the purposes enumerated in
its Articles of Incorporation.
c. Encumbrances on the property donated, if
assumed by the donee.
d. The first 100K of the net gifts within the year.
e. Those provided under special laws.
For resident or citizen donor only (RC/NRC/RA)
 Dowries or gift made on account of marriage
and before its celebration or within one year
thereafter, by parents to each of their
legitimate, recognized natural or adopted
children, to the extent of 10K.
 Gifts from Conjugal Partnership Property
made by the spouse:
The gift is taxable one-half to each donor’s
spouse. The reason is that they are considered
co-owners of conjugal properties. Neither may
donate any community property
or conjugal partnership property without the
consent of the other, except gifts of moderate
value for charity or on occasion of family
rejoicing or distress.
 Donation between husband and wife during
marriage:
The gift is not taxable, as it is declared void by
law. This rule, however, does not apply to
donations mortis causa or to moderate gifts
which the spouses may give each other on
occasion of any family rejoicing. This
prohibition applies to persons living together
as husband and wife without valid marriages.
 If husband and wife jointly donate, they
are considered separate and distinct tax
payers for purposes of the donor’s tax.

 Void donations are not subject to donor’s
tax. Thus, donations of real property sans
a public instrument is void- (no donor’s
tax).
Donations with encumbrances:
The encumbrance on the property donated is
deductible from the donor’s tax if the tax is
assumed by the donee.
Gift Splitting -It is a tax scheme to reduce donor’s
taxes in a given year by spreading the gift over the
numerous years. This results in view of the fact
that donor’s taxes are computed on the basis of the
total net gifts made during the calendar year. This
process is not prohibited because it is considered
as tax avoidance.
TRUST ARRANGEMENTS
 Irrevocable trusts are taxed as donation upon
transfer of property to the trustee
 Trust income is subject to income tax but the
incidence of the tax depends on the provision
on distribution
 Transfer of divided interest will make the
usufructuary liable to income tax. Merger of
the usufruct in the owner of the naked title is
not subject to estate tax.
Other implications of inter vivos gift
 Splitting of gifts during the calendar year to
avoid cumulative effect of the donor’s tax.
 Property donated is not subject to income tax
in the hands of the done but the income from
said property is taxable.
 Encumbrances on the property reduces the
value of the taxable gift.
DONOR’S TAX RETURN
To be filed within thirty (30) days after the gift is
made. The return shall be under oath in duplicate
setting forth:
a. Each gift made during the calendar year
which is to be included in computing net gifts;
b. The deductions claimed and allowable;
c. Any previous net gifts made during the same
calendar year;
d. The name of the donee;
e. Relationship of the donor to the donee; and
f. Such further information as may be required
by rules and regulations made pursuant to
law.
NOTE: The tax is paid at the time the return is
filed within said period.
FILING OF RETURN AND PAYMENT OF TAX
a. Resident Donor
 To an accredited agent bank, RDO, revenue
Collection Officer or duly authorized
99
treasurer of the city or municipality where the
donor is domiciled at the time the transfer, or
 If there be no legal residence in the
Philippines, with the Commissioner.
b. Non-resident donor
 Philippine Embassy or Consulate in the
country where he is domiciled at the time of
the transfer, or
 Directly with the Office of the Commissioner
VALUE ADDED TAX
(VAT)
VAT is a tax on consumption levied on sale,
exchange, barter or lease of goods or properties or
services in the Philippines and on importation of
goods in to the Philippines whether for
consumption or sale.
CHARACTERISTICS OF VAT
(1996 Bar)
1. It is a tax on value added of a taxpayer.
2. It is collected through the tax credit method.
3. It is a transparent form of sales tax.
4. It is a broad-based tax on consumption of
goods, properties or services in the
Philippines. (“Broad-based” means that every
sale of goods, properties or services at the
levels of manufacturers or producers and
distributors is subject to value added tax.)
5. It is an indirect tax.
6. The Philippines adopted the “tax-inclusive
method.” (This means that sale of goods by the
supplier must be subject to value added tax in
order to entitle the buyer who is also subject
to VAT to credit the input tax from the output
tax on his taxable sales.)
7. There is no cascading in the value added tax
system.
NOTE: Tax pyramiding means tax upon a tax.
Nature of VAT:
a. It is an indirect tax; hence, amount of the tax
may be shifted or passed on to the buyer.
 IMPACT OF TAX is on the seller upon
whom the tax has been imposed
 INCIDENCE OF TAX is on the final
consumer, the place at which the tax the
tax comes to rest.
b. It is a privilege tax; hence, the tax is imposed
not on the goods, properties or services as
such, but on the sale, barter, exchange or
lease of goods or properties, or the sale or
performance of services for a fee,
remuneration, etc.
c. It is a uniform tax computed at the rate of 0%
or 12% of the gross selling price of goods or of
gross receipts realized from the sale of
services.
 100 |TAXATION LAW REVIEWER
d. It is an ad valorem tax because it is based on
the gross selling price or gross value in money,
or gross receipts derived from the transaction.
e. It is a tax on the value added by every seller
as the goods, properties or services pass along
the distribution chain, unless the seller is
exempt.
TAX CREDIT METHOD
(sometimes called “invoice method”)
This refers to the manner by which the value
added tax of a taxpayer is computed. The input
taxes shifted by the sellers to the buyer are
credited against the buyer’s output taxes when he
in turn sells the taxable goods, properties or
services. (Sec. 105 and 110 [A], NIRC)
DESTINATION PRINCIPLE
(Cross Border Doctrine)
The Cross Border Doctrine states that no VAT
shall be imposed to form part of the cost of goods
destined for consumption outside of the territorial
border of the taxing authority. Hence, actual
export of goods and services from the Philippines
to a foreign country must be free of VAT; while,
those destined for use or consumption within the
Philippines shall be imposed with twelve percent
(12%) VAT. It is also known as the destination
principle.
PERSONS LIABLE
(Sec. 108, NIRC)
1. Any person (Individual, trust, estate,
partnership, corporation, joint venture,
cooperatives or association) who, in the course
of trade or business, sells, barters, exchanges,
leases goods or properties, or who undertakes
transactions that are deemed sale for VAT
purposes.
2. Any person who renders selected service,
unless exempted.
3. Any person who imports goods whether for
business or non-business purposes.
4. It includes all those formerly liable to pay the
taxes replaced by VAT except those under
Section 103.
5. Franchise grantees of radio and/or television
broadcasting, whose gross annual receipts for
the preceding calendar do not exceed 10 M and
who has registered under the VAT system.
6. In the strict sense, it refers only to:
manufacturer, producers, wholesalers,
retailers, traders, importers, sellers and
lessors of properties (real and personal) and
persons rendering selected services like
brokers, contractors, etc.
7. Taxable Person- refers to any person liable for
his payment of VAT whether or not registered
under the VAT system.
TRANSACTIONS COVERED BY VAT
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
(CESI)
1. Sale of commodities or goods (in the course of
trade of business).
2. Exportation (in the course of trade or
business).
3. Sale of services (in the course of trade or
business).
4. Importation (whether or not in the course of
trade or business.
IN THE COURSE OF TRADE OR BUSINESS
Regular conduct or pursuit of a commercial or an
economic activity, including transactions
incidental thereto, by any person, regardless of
whether or not the person engaged therein is a
non-stock, non-profit private organization
(irrespective of the disposition of its net income
and whether or not it sells exclusively to members
or their guests) or government entity.
VAT ON SALE OF GOODS OR PROPERTIES
Requisites or Elements of Taxable Sale of Goods
and/or Properties:
1. There must be actual or deemed sale of goods
or services for valuable consideration in the
Philippines;
2. The sale must be made by a taxable person in
the course or furtherance of his business;
3. For the use consumption in the Philippines;
4. Not exempt from VAT under the Tax code.
TAX BASE and TAX RATE: 12% of the gross
selling price or gross value in money of the goods
or properties sold, bartered or exchanged, such tax
to be paid by the seller or transferor.
Gross Selling Price- the total amount of money or
its equivalent which the purchaser pays or is
obligated to pay, including any excise tax, to the
seller in consideration of the sale, barter or
exchange of goods, excluding VAT (Sec. 106,
NIRC).
Gross receipts from lease of property covered by
the VAT law are subject to VAT regardless of the
place where the contract of lease was executed, if
the property on lease is located in the Philippines.
GOODS or PROPERTIES include all tangible and
intangible objects which are capable of pecuniary
estimation and shall include, among others:
(TEMPR)
1. Real properties primarily for sale to
customers or held for lease in the ordinary
course of trade or business;
2. The right or privilege to use patent, copyright,
design or model, plan, secret, formula or
process, goodwill, trademark, trade brand, or
other like property;
3. The right or privilege to use in the Philippines
of any industrial, commercial, or scientific
equipment;

4. The right or privilege to use motion pictures,
films, tapes, and discs; and
5. Radio, television, satellite transmission and
cable transmission time (Sec. 106, NIRC).
SALE OF REAL PROPERTIES held primarily for
sale to customers or held for lease in the ordinary
course of trade or business of the seller shall be
subject to VAT.
1. Residential lot with gross selling price
exceeding Php 1.5 million;
2. Residential house and lot or other residential
dwellings with gross selling price exceeding
Php 2.5 million.
NOTE: Whether the instrument is nominated as a
deed of absolute sale, deed of conditional sale or
otherwise.
SALE OF REAL PROPERTY ON INSTALLMENT
PLAN
The real estate dealer shall be subject to VAT on
installment payments including interest and
penalties, actually and/or constructively received
by the seller.
 The initial payments of which in the year of the
sale do not exceed twenty-five percent (25%) of
the gross selling price.
Gross Selling Price (in case of sale or exchange of
real property)- the consideration stated in the
sales document of the FMV whichever is higher. If
the VAT is not billed separately in the document
of sale, the selling price or the
consideration stated therein shall be deemed to be
inclusive of VAT.
SALE OF REAL PROPERTY ON A DEFERRED
PAYMENT BASIS
The transaction shall be treated as cash sale
which makes the entire selling price taxable in the
month of the sale.
 The initial payments of which makes the
entire selling price taxable of which in the
year of the sale exceed twenty-five percent
(25%) of the gross selling price.
ZERO-RATED SALES
OF GOODS OR PROPERTIES
a. Export Sales (ANEGEI)
1. Direct importation - the sale and actual
shipment of goods from the Philippines to a
foreign country, paid for in acceptable
foreign currency or its equivalent in goods
or services and accounted for in accordance
with BSP rules;
2. Indirect importation - the sale of raw
materials to a non-resident buyer for
delivery to a resident local export-oriented
101
enterprise to be used in manufacturing,
processing, packing or repacking in the
Philippines of the said buyer’s goods, paid
for in acceptable foreign currency and duly
accounted for in accordance with BSP rules;
3. Sale of raw materials or packaging
materials (RM/PM) to an export-oriented
enterprise whose export sales exceed 70% of
the total annual production;
4. Sale of gold to the BSP;
5. Those considered export sales under E.O.
No. 226 (Omnibus Investment Code of 1987)
and other special laws;
6. The sale of goods, supplies, equipment and
fuel (GSEF) to persons engaged in
international shipping or international
transport operations.
NOTE: Importations of GSEF by such
persons are VAT-exempt.
CONSIDERED EXPORT SALES
Without actual exportation, the following shall
be considered CONSTRUCTIVELY
EXPORTED for purposes of these provisions:
1. sales to bonded manufacturing warehouses
of export-oriented manufactures;
2. sales to export processing zones;
3. sales to registered export traders operating
bonded trading warehouses supplying raw
materials in the manufacture of export
products under guidelines to be set by the
board in consultation with the BIR and
BOC;
4. sales to diplomatic missions and other
agencies and/or instrumentalities granted
tax immunities of locally manufactured,
assembled or repacked products, whether
paid for in foreign currency or not.
b. Foreign Currency Denominated Sales
 sales to whom: non-resident
 of what: goods assembled or
manufactured in the Philippines.
 except: automobiles and non-essential
goods (jewelries, perfumes, yachts, etc.)
 to whom delivered: resident of the
Philippines.
 Paid for in acceptable foreign currency
 Duly accounted for in accordance with the
BSP rules
c. Effectively Zero-Rated Transactions
Sales to whom: persons or entities exempted
under special laws or international
agreements to which the Philippines is a
signatory
Effectively zero-rated sales of goods and
properties:
Refer to the sale by a VAT registered person
to a person or entity who was granted indirect
tax exemption under special laws or
international agreements. This shall be
 102 |TAXATION LAW REVIEWER
limited to the local sale of goods and
properties to said persons and/or entities.
Except for actual export sale, other cases of
zero-rated sales shall require prior
application with the RDO for effective zero-
rating. Without an approved application for
effective zero-rating, the transaction
otherwise entitled to zero-rating shall be
considered exempt.
TRANSACTIONS DEEMED SALE
1. Transfer, use or consumption not in the
course of business of (1) goods or properties for
sale (2) goods to be used in the course of
business.
a. When the VAT-registered person
withdraws goods from his business for his
personal use.
b. A domestic corporation instead of selling
all its products to an exclusive dealer
distributed some of its employees –
subject to VAT, because the articles could
have been used in trade.
2. Distribution or transfer:
a. to shareholders or investors as share in
the profits of the business;
Property dividends which are distributed
by the company to its shareholders and
declared out of retained earnings shall be
subject to VAT based on the market value
or zonal valuation, whichever is higher,
at the time of receipt to creditors in
payment of debt or obligation.
3. Goods consigned and not sold within 60 days
from date of consignment. Consigned goods
returned by the consignee within the 60-day
period are not deemed sold.
4. Retirement from or cessation of business with
respect to inventories of taxable good
(including capital goods) then existing
whether or not the business is continued by
the new owner or successor.
CHANGES IN OR CESSATION OF STATUS OF
VAT-REGISTERED PERSON
1. Subject to tax – the VAT provided for in Sec.
100 shall apply to goods originally and capital
goods which exist as of the occurrence of the
following:
a. Change of business activity value-added
taxable status to exempt status.
b. Approval of a request for cancellation of
registration due to reversion to exempt
status for failure to go beyond Php1.5M
sales for 2 consecutive taxable years.
c. Approval of a request for cancellation of
VAT-registration due to a desire to revert
to exempt status after the lapse of 2
consecutive years from the time of VAT-
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
registration by a person who voluntarily
registered in spite of being exempt.
d. Approval of a request for cancellation of
registration of one who commenced
business with the exception of gross sales
or receipts exceeding Php1.5M, but who
failed to exceed this amount during the
first 12 months of operation.
2. Not subject to output tax – the VAT shall not
apply to goods existing as of the occurrence of
the following:
a. Change of control of a corporation by the
acquisition of the controlling interest of
such corporation by another stockholder or
groups of stockholders.
b. Change in the trade or corporate name of
the business.
c. Merger or consolidation of a corporation.
VAT ON IMPORTATION OF GOODS
TAX BASE and TAX RATE: 12% based on:
1. Total value used by the BOC in determining
tariff and customs duties, plus customs
duties, excise taxes, if any, and other charges;
or
2. Landed cost in case the valuation used by the
BOC is based on volume and quantity. Landed
cost consists of the invoice amount, customs
duties, freight, insurance and other charges
and also excise tax, if any.
Same rule applies to technical importation of
goods sold by a person located in a Special
Economic Zone to a customer located in a customs
territory (Rev. Reg. No. 16-2005 Sec. 4, 107-1).
Technical Importation
Sale of goods by a PEZA registered enterprise to a
buyer from the customs territory shall be treated
as a technical importation. Such buyer shall be
treated as an importer thereof and shall be
imposed with the corresponding import taxes.
Importer refers to any person who brings goods
into the Philippines, whether or not made in the
course of trade or business. It includes non-exempt
persons or entities who acquire tax-free imported
goods from exempt persons, entities or agencies.
TRANSFER OF GOODS BY TAX EXEMPT
PERSONS
Where the importer is exempt from VAT and such
goods imported were subsequently sold,
transferred or exchanged in the Philippines to a
non-exempt person or entity, the non-exempt
purchaser, transferee or recipient shall be
considered as the importer and shall be liable for
VAT due on such importation.
 103

VAT ON THE SALE OF SERVICE AND USE OR
LEASE OF PROPERTIES
Sale or Exchange of Services – performance of all
kinds of services in the Philippines for a fee,
remuneration or consideration whether in kind or
in cash (refer to Sec. 108, NIRC for complete list).
TAX BASE and TAX RATE: 12% of the gross
receipts derived from the sale or exchange of
services, including the use or lease of properties
Gross Receipts- the total amount of money or its
equivalent representing the contract price,
compensation, service fee, rental or royalty
including the amount charged for materials
supplied with the services and deposit applied as
payments for services rendered and advance
payments actually or constructively received
during the taxable period for the services
performed or to be performed for another person,
excluding VAT.
ZERO-RATED SALES OF SERVICES
(POSIST-R)
1. Processing, manufacturing or repacking of
goods
for: persons doing business outside the
Philippines
when: the goods are subsequently exported
Investments or the Export Development
Council in processing, converting or
manufacturing goods;
6. Transport of passengers and cargo by air or
sea vessels from the Philippines to a foreign
country;
7. Sale of power or fuel generated through
renewable sources of energy.
NOTE: The sale of power or fuel is the one being
subject to 0% and not the operation or
maintenance of such energy sources.
Zero-Rated VAT Transaction vs. Exempt
Transaction
A zero-rate sale of goods, properties and/or
services (by a VAT-registered person) is a taxable
transaction for VAT purposes, but shall not result
in any output tax. However, the input tax on
purchase of goods, properties or services related to
such zero-rated sale, shall be available as tax
credit or refund in accordance with existing
regulations. Under this type of sale, no VAT shall
be shifted or passed-on by VAT-registered
sellers/suppliers form the Custom Territory on
their sale, barter or exchange of goods, properties
or services to the subject registered Freeport Zone
enterprises.
A VAT-exempt transaction, on the other hand,
refers to the sale of goods, properties or services or
the use or lease of properties that is not subject to
VAT (output tax) under Section 109 of the Tax
Code. The seller/supplier is not allowed any tax
credit of VAT (input tax) on purchases related to
such exempt transaction. (Revenue Memorandum
Circular No, 50-2007)

ZERO-RATED EXEMPT
 paid for in acceptable foreign currency
All VAT is removed Removes the VAT
AND duly accounted for in accordance
from the goods, only at the exempt
with the BSP rules;
activity or stage
transaction.
2. Services other than those provided in No.2(a)
The taxpayer can The taxpayer is not
rendered to:
claim the refund or entitled to credit or
a. persons engaged in business outside the
input taxes passed on refund of the input tax
Philippines or;
to him by the passed on to him by
b. non-resident persons not engaged in
supplier, etc. or the supplier, etc.
business
credit such input
c. when the services were rendered
taxes on his non-zero-
d. paid for in acceptable foreign currency
rated transactions.
duly accounted for in accordance with
BSP rules Generally, taxable It is not taken into
3. Services rendered to exempt entities under sales are taken into account in
special laws and international agreements to account in determining turn-over
which the Philippines is a signatory; determining turn- or VAT registration
4. Services rendered to persons engaged over sales or sale for purposes.
exclusively in international shipping/ VAT registration
international air transport operations; purposes.
5. Those performed for an enterprise whose
export sales exceed 70% of the annual
production, by subcontractors and/or VAT EXEMPT TRANSACTIONS
contractors duly accredited by the Board of
VAT exempt transactions in general
 104 |TAXATION LAW REVIEWER
It is the transaction where the sale of goods,
properties or services and the use or lease of
properties are not subject to VAT (Output tax) and
the seller or lessor is not allowed to any tax credit
on VAT (input tax) previously paid.
The person making the exempt sale or lease of
goods, properties or services shall not bill any
output tax to his customers because the said
transaction is not subject to VAT. On the other
hand, a VAT-registered purchaser or lessee of
goods, properties or services which are exempt
from VAT is not entitled to any input tax on such
purchase or lease despite the issuance of a VAT
invoice or receipt.
EXEMPT TRANSACTIONS:
1. Sale/ importation of agricultural and marine
food products in their original state; livestock
and poultry generally used for human
consumption;
NOTE: Products are considered in their
original state even if they have undergone
simple processes of preparation or preservation
for the market freezing, drying, salting,
broiling, roasting, smoking, and stripping
(FreD’S BroSS)
Rice, corn grits, sugar cane, molasses are
always considered in their original state (RiCo
SuMo)
2. Sale/ importation of fertilizers; seeds, seedlings
and fingerlings; fish, prawn, livestock and
poultry feeds;
3. Importation of personal and household effects,
provided:
a. The effects belong to residents returning
to/or non-residents coming to resettle in
the Philippines.
b. The effects are exempt under Tariff and
Customs Code.
4. Importation of professional instruments and
implements, wearing apparel, domestic
animals except vehicle, vessel, aircraft and
machinery used to manufacture any
merchandise in commercial quantity, provided:
a. the effects belong to persons coming to
settle in the Philippines
b. accompanying such persons or arriving
within 90 days before or after their
arrival
c. the effects are for their own use and not
for sale
d. evidence should be produced before the
Commissioner that the change or
Residence is bona fide
5. Services subject to percentage tax;
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
6. Services by agricultural contract growers and
milling for others of RiCo Su (rice, corn grits,
sugar cane);
7. Medical, dental, hospital and veterinary
services except those rendered by
professionals;
8. Educational services rendered by government
educational institutions and private
educational institutions accredited by DepEd,
CHED, TESDA;
9. Services rendered pursuant to an employer-
employee relationship;
10. Services rendered by regional or area
headquarters established by Multinational
Corporations;
11. Transactions exempt under special laws and
international agreements to which the
Philippines is a signatory except those under
P.D. 529;
12. Sales by agricultural cooperatives registered
and in good standing with the Cooperative
Development Authority (CDA) to:
 their members – whether or not the
cooperative is the producer
 non-members – only if the cooperative is a
producer, whether in its original state or
processed form
 importation of direct farm inputs,
machineries and equipment, including
spare parts thereof, to be used directly and
exclusively in the production and/or
processing of their produce shall also be
exempt.
NOTE: Sale or importation or agricultural
food products in their original state is exempt
from VAT irrespective of the buyer or seller
thereof;
13. Gross receipts from lending activities by
credit of multi-purpose cooperatives
registered with the CDA;
14. Sales by non-agricultural, non-electric and
non-credit cooperatives registered with the
CDA, provided that the share capital
contribution of each member does not exceed
Php15,000 and regardless of the aggregate
capital and net surplus ratably distributed
among members
 importation of these cooperatives of
machineries and equipment, including
spare parts thereof, to be used by them
are subject to VAT;
15. Export sales by persons who are not VAT-
registered;

16. Sale of real property
Sales exempt:
a. not primarily held for sale to customers or
held for lease in the ordinary course of
trade or business;
b. utilized for low-cost housing
c. utilized socialized housing;
d. residential lot valued at Php1.5 million
and below;
e. house and lot and other residential
dwellings valued at Php2.5 million and
below;
f. two or more adjacent residential lots
where the aggregate value does not
exceed Php1.5 million
Even if the real property is not primarily held
for sale to customers or held for lease in the
ordinary course of trade or business but the
same is used in the trade or business of the
seller, the sale thereof shall be subject to VAT
being a transaction incidental to the
taxpayer’s main business
17. Lease of residential units if the monthly
rental
 less than Php12,800, regardless of the
aggregate rentals received by the lessor
 exceeds Php12,800 but the aggregate
rentals received by the lessor do not
exceed Php1.5 million, however the same
shall be subject to 3% percentage tax;
18. Sale/ importation, printing, publication of
books and any newspaper, magazine, review
or bulletin, which appear at regular intervals
with fixed price for subscription and which are
not devoted principally for paid
advertisements;
19. Sale/ importation, or lease of passenger or
cargo vessels and aircraft including engine,
equipment and spare parts thereof for
domestic or international transport
operations weighing 150 tons and above;
20. Importation of (GSEF) goods, supplies,
equipment and fuel by persons engaged in
international shipping and air transport
operations;
21. Services of banks, non-bank financial
intermediaries performing quasi-banking
activities;
22. Sale or lease of goods, properties or services
where the gross annual sales and/or receipts
do not exceed P1, 919,500.
Any person exempt as aforementioned from
the payment of VAT and who is not a VAT-
registered person shall pay a tax equivalent to
three percent (3%) of his gross quarterly sales
or receipts.
105
NOTES:
A VAT registered person may elect that the
exemption shall not apply to his sales of goods,
properties or services. Once election is made, it
shall be irrevocable for a period of three (3) years
counted from the quarter when the election was
made, except for franchise grantees of radio and
TV broadcasting whose annual gross receipts for
the preceding year do not exceed Php10 million
where the option is perpetually irrevocable. (Rev.
Reg. No. 4-2007).
VAT-registered person may elect so that an input
tax may be deducted from the output tax as input
tax credit unlike in exempt transactions where it
is not subject to output tax and the seller is not
allowed any tax credit of input tax on purchases.
The imposition of VAT on toll fees cannot be
deemed a “tax on tax” as toll fees are not taxes.
Toll fees, which are collected by private tollway
operators as reimbursement for the costs and
expenses incurred in the construction,
maintenance, and operation of tollways as well as
to insure the operators a reasonable margin of
income, are not assessed and collected by the BIR
and do not go to the general coffers of the
government.
Although toll fees are charged for the use of public
facilities, they are not government exactions that
can be properly treated as tax.
Even if toll fees were deemed as a “user's tax,”
VAT on tollway operations still cannot be held as
a “tax on tax” due to the nature of VAT as an
indirect tax. Tollway operators, as the seller of
services, are directly liable for the VAT. VAT is
assessed against the tollway operators' gross
receipts and not necessarily on the toll fees.
Although operators may shift the VAT burden to
tollway users, it will not make the latter directly
liable for the VAT as the shifted VAT simply
becomes part of the toll fees.
In this connection, the Court held that it cannot
be bound by the discussion in Manila
International Airport Authority vs. CA which
equated “terminal fees” to a “user's tax” as the
case's discussion on toll roads and toll fees was
made, not to establish a rule that tollway fees are
user's tax, but to make the point that airport lands
and buildings are properties of public dominion
and that the collection of terminal fees for their
use does not make them private properties.
(DIAZ vs. SECRETARY OF FINANCE, JULY 19,
2011)
PHILHEALTH’s services are not VAT-exempt.
Those exempted from VAT are those engage in the
performance of medical, dental, hospital and
veterinary services except those rendered by
professionals.
 106 |TAXATION LAW REVIEWER
PHILHEALTH is not actually rendering medical
service but merely acting as a conduit between the
member and their accredited and recognized
hospitals and clinics. It merely provide and
arranges for the provision of pre-need health care
services to its members for a fixed prepaid fee for
a specified period of time; that it then contracts the
services of physicians, medical and dental
practitioners, clinics and hospitals to perform such
services to its enrolled members; and that it enters
into contract with clinics, hospitals, medical
professionals and then negotiates with them
regarding payment schemes, financing and other
procedures in the delivery of health services.
As PHILHEALTH does not actually provide
medical and/or hospital services, as provided
under Section103 on exempt transactions, but
merely arranges for the same, its services are not
VAT-exempt. (Commissioner of Internal Revenue
vs. Philippine Health Care Providers Inc., G.R. No.
168129, April 24, 2007)
Gross receipts derived from sales of admission
tickets in showing motion pictures is not subject to
VAT. The legislative intent is not to impose VAT
on persons already covered by the amusement tax.
The repeal by the Local Government Code of 1991
of the Local Tax Code transferring the power to
impose amusement tax on cinema/theater
operators or properties to the local government did
not grant nor restore the said power to the
national government nor did it expand the
coverage of VAT. The power to impose amusement
tax on cinema/theater operators or properties
remains with the local government.
(Commissioner of Internal Revenue vs. SM Prime
Holdings, Inc., G.R. Ni. 185305, February 26,
2010)
Distinguish VAT-exempt transactions from VAT-
exempt entities.
An exempt transaction involves goods or services
which, by their nature, are specifically listed in
expressly exempted from VAT under the Tax
Code, without regard to the tax status – VAT-
exempt or not – of the party to the transaction.
An exempt party, on the other hand, is a person or
entity granted VAT exemption under the Tax
Code, a special law or an international agreement
which the Philippines is a signatory, and by virtue
of which its taxable transactions become exempt
from VAT. (Commissioner of Internal Revenue vs.
Seagate Technology, G.R. No. 153866, February
11, 2005)
INPUT AND OUTPUT TAX
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
INPUT TAX – the value-added tax due from or
paid by a VAT-registered person in the course of
his trade or business on importation of goods or
local purchase of goods or services, including lease
or use of property, from a VAT-registered person.
OUTPUT TAX – the value-added tax due on the
sale or lease of taxable goods or properties by any
person required to register
SOURCES OF INPUT TAX
a. Purchase or importation of goods (a) for sale or
(b) for conversion into or intended to form part
of a finished product for sale, including
packaging materials or (c) for use as supplies
in the course of business or (d) for use as raw
materials supplied in the sale of services, or (e)
for use in trade or business for which deduction
for depreciation or amortization is allowed
under the Tax Code.
b. Purchase of services in which a VAT has
actually been paid
c. Purchase of real properties for which a VAT
has actually been paid
d. Transactions deemed sale for VAT purposes
e. Transitional input tax
f. Presumptive input tax
g. Transitional input tax credits allowed under
the transitory and other provisions under VAT
regulations
Creditable Input Tax
It is any input tax on the following transactions
evidenced by a VAR invoice or official receipt
issued by a VAT-registered person shall be
creditable against output tax:
a. Purchase/Importation
1. for sale; or
2. for conversion into or intended to form part
of a finished product for sale including
packaging materials; or
3. for use as supplies in the course of
business; or
4. for use as materials supplied in the sale of
services; or
5. for use in trade or business for which
deduction for depreciation or amortization
is allowed; or
b. Purchase of services on which a VAT has
actually been paid creditable to:
1. the purchaser upon consummation of the
sale and on importation of goods and
properties
2. the importer upon payment of the VAT
prior to the release of the goods from
custom’s custody
3. to the purchaser, lessee or licensee upon
payment of the compensation, rental,

royalty or fee, in case of purchase of
services or lease or use of properties
Q: When may property dividends be subject to
VAT?
A: Property dividends which constitute stocks in
trade or properties primarily held for sale or
lease declared as retained earnings on or after
January 1, 1996 and distributed by the
company to its shareholders shall be subject to
VAT based on the zonal value or fair market
value at the time of distribution whichever is
applicable.
TRANSITIONAL INPUT TAX
Transitional input tax on the inventory on hand as
of the effectivity of the VAT registration of:
1. Taxpayers who became VAT-registered
persons upon exceeding the minimum
turnover of Php1.5 million in any 12-month
period; or
2. Voluntarily registers as a VAT payer even if
turnover does not exceed Php1.5 million;
3. Whichever is higher between:
a. 2% of the value of the beginning inventory
on hand; or
b. Actual VAT paid on such goods, materials
and supplies
The amount is creditable against the output tax of
a VAT-registered person.
Presumptive Input Tax
Persons engaged in the:
1. Processing of sardines, mackerel and milk;
2. Manufacturing refined sugar, cooking oil and
packed noodle-based instant meals.
 The presumptive input tax shall be 4% of
the gross value in money of their
purchases of primary agricultural
products which are used as inputs to their
production.
 The amount is creditable against the
output tax of a VAT-registered person.
DETERMINATION OF OUTPUT/INPUT TAX;
VAT PAYABLE; Computation of VAT Payable or
EXCESS INPUT CREDIT TAX
1. for the Sale of Goods or Properties
 12% of the “gross selling price” or gross
value in money (effective February 1,
2006)
NOTE: Such tax shall be paid by the seller or
the transferor.
2. for the Importation of Goods
107
 12% of the total value used by the Bureau
of Customs in determining tariff and
customs duties, excise taxes and other
charges; or
 12% of the landed cost plus excise taxes
where the customs duties are determined
on the basis of the quantity or volume of
the goods
 such tax shall be paid by the importer
prior to the release of the goods from
Customs’ custody
3. for the Sale of Services and Use or Lease of
Properties
 12% of the “gross receipts” derived from
the sale or exchange of services
RULES on Input Tax on Capital Goods:
a. if the aggregate acquisition cost of the capital
goods, excluding VAT, exceeds P1, 000,000;
and
b. where such goods are purchased or imported
in a calendar month for use in trade or
business for deduction for depreciation is
allowed;
c. then, the input tax shall be spread evenly over
a period of 60 months, commencing from the
month the acquisition was made
d. provided, however, that if the estimated
useful life of such goods is less than 5 years,
then the input VAT shall be spread over such
shorter period.
Deductions or Exclusions from Gross Sales/
Receipts
1. Discounts
a. Must be determined and granted at the
time of sale
b. Expressly indicated in the invoice
c. The amount thereof forms part of the gross
sales duly recorded in the books of the
seller
d. The grant of which does not depend upon
the happening of a future event
2. Sales Returns and Allowances
a. A proper credit or refund was made
b. The sales previously recorded as taxable
sales
Allocation of Input Tax on Mixed Transactions
A VAT-Registered person also engaged in non-
vatable transactions shall be allowed tax credit as
follows:
a. total input tax directly attributable to vatable
transactions;
b. a ratable portion of any input tax which
cannot be directly attributed to either
activity.
EXCESS Output (O) or Input (I) Tax
a. if, O > I ; then, the excess shall be paid by the
VAT-registered person
 108 |TAXATION LAW REVIEWER
b. if, I > O; then, the excess shall be carried over
to the succeeding quarters or quarters,
provided:
1. the input tax carried over from the
previous quarter shall not exceed 70% of
the output VAT
2. the input tax attributable to zero-rated
sales may, at the option of the taxpayer, be
refunded or credited against other internal
revenue taxes
3. The excess input tax to be carried over
from the preceding month or quarter shall
be reduced by:
a. amount of claim for refund or tax credit
for VAT
b. other adjustments, such as purchase
returns or allowances
c. input tax attributable to exempt sales
Substantiation of Input Tax Credits
1. In cases involving claims for refund of input
VAT, the claimant must substantiate its claim
by presenting duly registered official receipts
and invoices.
2. It is important to present in evidence the
invoices pertaining to the taxable sales and
the corresponding input VAT.
REFUND OR TAX CREDIT OF
EXCESS INPUT TAX
Refunds or Tax Credits for Zero-Rated or
Effectively Zero-Rated Sales
a. taxpayer must be VAT-registered; otherwise,
the transaction is exempt which does not
entitle him to any refund or tax credit;
b. application for a tax credit certificate or
refund must be made within 2 years after the
close of the taxable quarter when the sales
were made;
c. to the extent that the input tax has not been
applied against output tax.
d. the transactions are paid for in an acceptable
foreign currency and duly accounted for in
accordance with BSP rules.
e. in the case of a person whose registration is
cancelled due to retirement from or cessation
of business, or due to changes in or cessation
of status, the application may be made within
2 years from the date of cancellation.
f. in other appropriate cases, the Commissioner
shall grant refund or issue the tax credit
certificate for creditable input taxes within
120 days from the date of submission of
complete documents in support of the
application
Rules where the taxpayer is engaged in zero-rated
or effectively zero-rated transactions and also in
taxable or exempt sales
a. the amount of the creditable input tax due or
paid which cannot be directly and entirely
attributed any one of the transactions shall be
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
allocated proportionately on the basis of the
volume of sales
b. in case of a person making zero-rated and non
zero-rated sales, the input tax shall be
allocated ratably between his zero-rated and
non zero-rated sales
Who may claim for refund or apply for issuance of
Tax Credit Certificate (TCC)
1. The purchaser of the domestic goods or
properties upon consummation of the sale and
on the importation of said goods or properties;
2. The importer upon payment of VAT prior to
the release of goods from customs custody;
3. The purchaser of services or the lessee or the
licensee upon payment of the compensation,
rental, royalty or fee.
Period to file claim or apply for issuance of TCC
 Any VAT-registered person whose sales of
goods, properties or services are zero-rated or
effectively zero-rated may, within two (2) years
after the close of the taxable quarter when the
sales were made, apply for the issuance of a
TCC or refund of the creditable input tax or
paid attributable to such sale.
 The CIR shall grant a refund or issue the tax
credit certificate for creditable input taxes
within 120 days form the date of submission of
complete documents in support of the
appliaction filed. The taxpayer affected may,
within 30 days from the receipt of the decision
denying the claim or after the expiration of the
120-day period, appeal the decision or the
unacted claim with the Court of Tax Appeals.
Manner of Giving Refund
Refunds shall be made upon warrants drawn by
the CIR or by his duly authorized representative
without the necessity of being countersigned by
the Chairman of Commission on Audit, the
provisions of the Administrative Code of 1987 to
the contrary notwithstanding: Provided, that
refunds under this paragraph shall be subject to
post audit by the Commission on Audit.
INVOICING REQUIREMENTS
A VAT-registered person is required to issue:
1. a VAT invoice for every barter, sale or
exchange of goods or properties; and
2. a VAT official receipt for every lease of goods or
properties and for every sale, barter of or
exchange or services.
The VAT invoice or VAT official receipt shall state
the following:
1. A statement that the seller is a VAT
registered person, followed by his Tax
Identification Number (TIN);
2. The total amount which the purchaser pays or
is obliged to pay to the seller with the

indication that such amount includes the
VAT, provided that:
a. the amount of the tax shall be shown as a
separate item in the invoice or receipts;
b. if the sale is except from VAT, the term
“VAT-exempt sale” shall be written or
printed prominently on the invoice or
receipt
c. if the sale is subject to zero percent (0%)
VAT, the term “zero-rated” shall be
written or printed prominently on the
invoice or receipt
d. the date of transaction, quantity, unit
cost and description of the goods or
properties or nature of the service;
3. In the case of sales in the amount of one
thousand pesos or more where the sale on
transfer is made to a VAT-registered person,
the name, business style, if any, address and
TIN of the purchaser, customer or client.
Consequences of Issuing Erroneous VAT Invoice
or VAT Official Receipt
1. If a person who is not a VAT-registered person
issues an invoice or receipt showing his TIN,
followed by the word “VAT”:
a. The issuer shall, in addition to any liability
to other percentage taxes, be liable to:
i. The tax imposed in Sec. 106 or 108
without the benefit of any input tax
credit
ii. A 50% surcharge under Sec. 248 (B)
b. The VAT shall, if other requisite
information required under subsection (b)
hereof is shown on the invoice or receipt,
be recognized as an input tax credit to the
purchaser under Sec. 110.
2. If a VAT-registered person issues a VAT
invoice or VAT official receipt for a VAT-
exempt transaction, but fails to display
prominently on the invoice or receipt the term
“VAT-exempt sale”, the issuer shall be liable
to account for the tax imposed in Sec. 106 or
108 as if Sec. 109 did not apply.
FILING OF RETURN AND PAYMENT OF VAT
Every person liable to pay VAT shall file a
quarterly return of the amount of his gross sales
or receipts within twenty-five (25) days following
the close of each taxable quarter.
 The payment of the VAT shall be made on a
monthly basis.
 Taxable quarter shall mean the quarter that is
synchronized to the income tax quarter of the
taxpayer (i.e., the calendar year or fiscal year)
Required to File a VAT Return
1. Every person or entity who in the course of his
trade or business, sells or leases goods,
109
properties and services subject to VAT, if the
aggregate amount of actual gross sales or
receipts exceed Php1.5 million for any twelve
month period;
2. A person required to register as VAT taxpayer
but failed to register;
3. Any person who imports goods; and
4. Professional practitioners (R.A. 7716 and
9010)
Services of Professional Practitioners are
subject to:
a. VAT if the gross professional fees exceed
Php1.5 million for a 12-month period; or
b. 3% Percentage Tax if the gross
professional fees does not exceed Php1.5
million for a 12-month period
“Professional Practitioners” include
1. Certified Public Accountants;
2. Insurance Agents (life or non-life);
3. Other professional practitioners required
to pass the government examinations.
WITHHOLDING OF VAT
(Sec 114 [C ])
The Government or any of its political
subdivisions, instrumentalities or agencies,
including GOCCs shall, before making payment
on account of purchase of goods and services
deduct and withhold a final VAT at the rate of 5%
of the gross payment thereof.
The payment for lease or use of properties or
property rights to non-resident owners shall be
subject to 10% withholding tax at the time of
payment.
COMPLIANCE REQUIREMENTS
(INTERNAL REVENUE TAXES)
ADMINISTRATIVE REQUIREMENTS
Registration Requirements
Any person who, in the course of trade or business,
sells, barters, or exchanges goods or properties or
engages in the sale or exchange of services shall be
liable to register if:
a. His gross sales or receipts for the past twelve
(12) months, other than those that are exempt
under Sec 109 (1) (a) to (w) of the NIRC, have
exceeded P 1,919,500.
b. there are reasonable grounds to believe that
his gross sales or receipts for the next twelve
months, other than those that are exempt
under Sec. 109 (1) (A) to (w) of the NIRC will
exceed P 1,919,500.
 110 |TAXATION LAW REVIEWER

The taxpayer requesting for transfer shall file the

Annual Registration Fees
The taxpayer must pay:
1. upon registration; and
2. every year thereafter
3. on or before January 31
4. an annual Registration Fee - Five Hundred
Pesos (Php500.00)
5. for every separate or distinct establishment or
place of business
6. paid to an authorized agent bank
7. located within the revenue district, or to the
Revenue Collection Officer, or duly authorized
Treasurer of the city or municipality where
each place of business or branch is registered.
Application for Update Form with the old RDO,
copy-furnished the new RDO. It shall be the duty
of the old RDO to transfer the accountabilities of
the taxpayer to the new RDO where he is
transferring. Both the new and the old RDO shall
be responsible in notifying the taxpayer concerned
that the transfer of registration has already been
effected.
Cancellation of Registration
The cancellation of registration of the taxpayer
may either pertain to cancellation of business
registration and/or TIN. The cancellation of the
former shall not automatically cancel the latter.

Registration of each type of internal revenue tax TIN is cancelled upon:

A taxpayer engaged in business is required to a) Death of an individual;
register each type of internal revenue tax for b) Dissolution, merger or consolidation of
which he is obligated to file a return and pay the juridical person;
corresponding tax. c) Discovery of a taxpayer having multiple TINs;
and
New VAT Exemption Thresholds d) Payment of estate tax by the heirs,
(Revenue Regulations No. 16-2011), (effective administrator or executor (TIN of the estate).
January 1, 2012)
The cancellation of business registration may be
OLD NEW granted on the following instances:
Sale of residential P 1,500,000 P 1,919,500 a) Closure/Cessation of business operation;
lot b) Dissolution of corporation/partnership;
Sale of residential P 2,500,000 P 3,199,200 c) Merger/Consolidation;
house and lot or d) Death of an individual.
other residential
dwellings Suspension of Business Operation
The CIR is empowered to suspend the business
operations and temporarily close the business
Sale or lease of P 1,500,000 P 1,919,500
goods or
establishment of any person (natural or juridical)
properties or the
for duration of not less than five (5) days for any of
performance of
the following violations:
services
a. In the case of VAT-registered person
Lease of P P
residential units 10,000/mo. 12,800/mo.
1. Failure to issue receipts or invoices:
regardless of the
2. Failure to file VAT return; and
amount of
3. Understatement of taxable sales or
aggregate rentals
receipts by 30% or more.
received
b. Failure of a VAT-registered person to register
by the lessor during
the Year
NOTE: The temporary closure does not apply to
exporters who fail to register.
Transfer of Registration
In case a taxpayer transfers his place of business Changes in or Cessation of Status of a VAT-
or his head office or branches, changes his registered Person:
registration information, or ceases to be liable to a 1. Subject to tax – the VAT provided for in Sec.
tax type, he must update his registration status. 100 shall apply to goods originally and capital
goods which exist as of the occurrence of the
Other Updates following:
The registration of employees of the transferring a. Change of business activity value-added
employers shall simultaneously be transferred to taxable status to exempt status.
the new RDO once the transfer of registration of b. Approval of a request for cancellation of
the employer is effected. registration due to reversion to exempt
status for failure to go beyond Php1.5M
Transfer of Business Registration sales for 2 consecutive taxable years.
c. Approval of a request for cancellation of
VAT-registration due to a desire to revert

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012


to exempt status after the lapse of 2
consecutive years from the time of VAT-
registration by a person who voluntarily
registered in spite of being exempt.
d. Approval of a request for cancellation of
registration of one who commenced
business with the exception of gross sales
or receipts exceeding Php1.5M, but who
failed to exceed this amount during the
first 12 months of operation.
2. Not subject to output tax – the VAT shall not
apply to goods existing as of the occurrence of
the following:
a. Change of control of a corporation by the
acquisition of the controlling interest of
such corporation by another stockholder or
groups of stockholders.
b. Change in the trade or corporate name of
the business.
c. Merger or consolidation of a corporation.
NOTE: Agencies can refuse to do business with
vendors who fail to submit a TIN.
NOTE: (Please see discussion on INVOICING
REQUIREMENTS above)
Exhibition of certificate of payment at place of
business
The certificate shall be kept conspicuously
exhibited in plain view in or at the place of
business; and in case of a peddler or other persons
not having a fixed place of business, the same shall
be kept in the possession of the holder
thereof, subject to the production upon demand of
any internal revenue officer.
Continuation of business of deceased person
No additional payment that is required for the
residue of the term which the tax was paid,
Provided:
1. the person/s interested in the estate
2. should submit to BIR or regional or revenue
District Office
3. inventories of goods or stocks had at the time
of such death
4. within 30 days from death of the decedent
 This requirement is also applicable in the
case of transfer of ownership or change of
name of the business establishment.
Removal of business to other location
Any business which has paid the annual
registration fee, subject to the rules and
regulations prescribed by the Sec. of Finance, upon
recommendation of the CIR, be removed and
continued in any other place without the payment
of additional tax during the term for which the
payment has been made.
TAX RETURNS
111
These are reports prepared by the taxpayer
showing to internal revenue officers an
enumeration of taxable amounts and description
of taxable transactions, allowable deductions,
amounts subject to tax and the tax payable by the
taxpayer to the government.
INDIVIDUAL TAX RETURN
Who are required to file?
1. Resident citizen;
2. Non-resident citizen on income from within the
Phils.;
3. Resident alien on income from within the
Phils.;
4. NRAETB on income from within the Phils.;
5. An individual (citizen or alien) engaged in
business or practice of a profession within the
Phils. regardless of the amount of gross income;
6. Individual deriving compensation income
concurrently from two or more employers at
any time during the taxable year;
7. Individual whose pure compensation income
derived from sources within the Philippines.
exceeds P60, 000;
8. If the income tax withheld from the
compensation income was erroneous;
9. Citizens working abroad receiving income from
sources within the Philippines.
Return of Husband and Wife
 the income taxes of husband and wife are
computed separately
 but they are required to file only one income
tax return to include both their incomes.
 when it is not practicable to file one return,
then they may file separate returns.
 these returns will then be consolidated by the
BIR for verification purposes.
Return of Parent to Include Income of Children
General Rule: The income of the unmarried minor
shall be included in the income tax return of his
parent.
Exception:
1. when the donor’s tax has been paid on such
property; or
2. where the tansfer of such property is exempt
from donor’s tax.
Return of Persons Under Disability
The income tax return of any person who is
handicapped or disabled shall be filed by:
1. his duly authorized agent, or
2. representative, or
3. by his guardian, or
4. any other person charged with the care of his
person or property.
If the return filed is erroneous, false or fraudulent,
the statutory taxpayer and his representative or
 112 |TAXATION LAW REVIEWER
guardian shall assume the tax liability including
all the penalties imposed relative thereto.
Who are NOT required to file?
1. Individual whose gross income does not exceed
total personal and additional exemptions;
2. An individual with respect to pure compensation
income, derived from such sources within the
Philippines, the income tax on which has been
correctly withheld; Provided, That an individual
deriving compensation concurrently from two or
more employers at any time during the taxable
year shall file an income tax return (R.A. 9504);
3. Individual whose sole income has been
subjected to final withholding income tax;
4. A minimum wage earner or an individual who
is exempt from income tax pursuant to the
provisions of this Code and other laws, general
or special. (R.A. 9504)
Where to File:
Except where the Commissioner otherwise
permits, the return shall be filed:
 If person has legal residence or place of
business in the Philippines – with an
authorized agent bank, Revenue District
Officer, Collection Agent or duly authorized
Treasurer of the city or municipality in
which such person has his legal residence or
principal place of business in the Philippines;
 If there be no legal residence or place of
business in the Philippines - with the Office of
the Commissioner.
When to File:
The return of any individual specified above shall
be filed on or before the fifteenth (15th) day of
April of each year covering income for the
preceding taxable year.
CORPORATE RETURNS
Requirements:
1. The tax return of a taxable corporation shall be
filed by:
a. the president, or
b. vice-president, or
c. other principal officers
2. Shall be sworn to by such officer and by the
treasurer or assistant treasurer.
Declaration of Quarterly Corporate Income Tax
(Quarterly Summary Declaration)
It shall be filed within 60 days following the close
of each quarter.
Final Adjustment Return (Annual Corporate
Income Tax Return)
It shall be filed on or before April 15 or on or before
the 15th day of the 4th month following the close of
the fiscal, as the case may be.
Where to file both returns?
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
Except where the Commissioner otherwise
permits, the return shall be filed:
 If person has legal residence or place of
business in the Philippines – with an
authorized agent bank, Revenue District
Officer, Collection Agent or duly authorized
Treasurer of the city or municipality in which
such person has his legal residence or
principal place of business in the Philippines
 If there be no legal residence or place of
business in the Philippines - with the Office of
the Commissioner.
Taxable Year of Corporations
1. Calendar period – starts January 1 and
ends on December 31.
2. Fiscal period – starts on the 1st day of any
month other than January and ends 12
months thereafter.
The Corporation is not allowed to change its
accounting period employed without prior
approval from the CIR.
Extension of Time to File Return
 The CIR may, in meritorious cases, grant a
reasonable extension of time for the filing of
tax return.
 The request must be filed on or before the 1st
day of the period for filing returns.
Return of Corporation Contemplating Dissolution
or Reorganization
Within 30 days after the adoption of a resolution
or plan for dissolution or reorganization or within
the period prayed for by the taxpayer and allowed
by the CIR.
Return on Capital Gains Realized from Sale of
Shares of Stock not Traded in the Local Stock
Exchange
General Rule: Within 30 days after each sale or
disposition of shares of stock.
In case of installment sale:
 the return shall be filed within 30 days
following the receipt of the first down
payment and
 within 30 days following the subsequent
installment payments.
 shall be filed with the Authorized Agent Bank
(AAB) in the Revenue District where the
seller or transferor of stocks is registered.
 In places where there are no AAB, the return
will be filed directly with the Revenue
Collection Officer or Authorized City or
Municipal Treasurer.
Returns of Receivers, Trustees in Bankruptcy, or
Assignees
These persons operating the property or business
of a corporation should make returns of net income

as and for such corporation, in the same manner
and form as such organization is required to make
returns.
The tax due on income as returned by them shall
be assessed and collected in the same manner as if
done directly against the organizations of whose
businesses or properties they have custody or
control.
Return of General Partnerships
While this is not subject to income tax since the
partners are the ones liable to pay income tax in
their separate and individual capacities, it is
nonetheless required to file, in duplicate, a return
setting forth the items of gross income and of
deductions allowed by the Tax Code, and the
names, TINs, addresses and shares of each of the
partners.
The net income declared in this return shall be the
basis in determining the distributive share of each
partner, who in turn should report such
distributive share as part of his gross income.
Fiduciary Returns
Guardians, trustees, executors, administrators,
receivers, conservators and all persons or
corporations, acting in any fiduciary capacity,
should render, in duplicate, a return of the income
of the person, trust or estate for whom or
which they act in case such person, estate or trust
has a gross income of twenty thousand pesos
(Php20,000) or over during the taxable year.
ESTATE TAX RETURN (please refer to Estate
Tax section)
DONOR’S RETURN (please refer to Donor’s tax
section)
TAX PAYMENTS
INCOME TAXES
When and Where to Pay (Sec. 56, NIRC):
The return of any individual specified above shall
be filed on or before the fifteenth (15th) day of
April of each year covering income for the
preceding taxable year.
 The total amount of tax imposed shall be paid
by the person subject thereto at the time the
return is filed.
When the tax due is in excess of Two thousand
pesos (Php2,000)
The taxpayer other than a corporation may elect
to pay the tax in two (2) equal installments in
which case:
1. the first installment shall be paid at the time
the return is filed; and
113
2. the second installment, on or before July 15
following the close of the calendar year.
If any installment is not paid on or before the date
fixed for its payment, the whole amount of the tax
unpaid becomes due and payable, together with
the delinquency penalties.
ESTATE TAXES
General Rule: at the time the return is filed (Pay-
As-You-File Principle)
Exception: When the Commissioner finds that the
payment on the due date of the estate tax or of any
part thereof would impose undue hardship upon
the estate or any of the heirs he may extend the
time for payment of such tax or any part thereof
 not to exceed five (5) years, in case the estate
is settled through the courts;or
 two (2) years in case the estate is settled
extrajudicially.
NOTES:
The executor, administrator or beneficiary, as the
case may be, is required to furnish a bond in such
amount not exceeding double the amount of tax
and with such sureties as the Commissioner
deems necessary.
The CIR shall deny the application for extension
where the request for extension is by reason of:
 negligence,
 intentional disregard of rules and regulations,
 or fraud on the part of the taxpayer,
Liability for Payment
1. Primarily liable: the executor or
administrator before distributing the net
estate to the heirs
2. Subsidiarily liable: the heir or beneficiary to
the extent of his share in the inheritance
3. The liability of 2 or more executors of
administrators shall be several.
SAFEGUARDS IN THE NIRC FOR PAYMENT
OF THE ESTATE TAX
I. Duties of Certain Officers and Debtors
A. Executor or Administrator- must ensure
payment shall be made of the amount which
he is notified before he shall be discharged
from personal liability (Sec. 92, NIRC)
B. Judge - No judge shall authorize the
executor or judicial administrator to deliver
a distributive share to any party interested
in the estate unless a certification from the
Commissioner that the estate tax has been
paid is shown.
C. Registers of Deeds- shall not register in the
Registry of Property any document
transferring real property or real rights
 114 |TAXATION LAW REVIEWER
therein unless a certification from the CIR
that the tax due thereon had been paid.
D. Lawyer, Notary Public, Or Any
Government Officer - intervening in the
preparation or acknowledgment of
documents regarding partition or disposal
of donation inter vivos or mortis causa,
legacy or inheritance, shall have the duty of
furnishing the CIR or any internal revenue
officer of the place where he may have his
principal office, with copies of such
documents and any information whatsoever
which may facilitate the collection of the
tax.
E. Debtor of the deceased - shall not pay his
debts to the heirs, legatee, executor or
administrator of his creditor, unless the
certification of the CIR that the tax had
been paid is shown; but he may pay
them without said certification if the credit
is included in the inventory of the estate of
the deceased.
F. Corporation – will not transfer to the new
owners of shares, bonds, obligation or rights
without certification from the commissioner
that the tax actually due thereon had been
paid (Sec. 97, NIRC).
G. Bank – when it has the knowledge of the
death of a person who maintained a joint
account, it shall not allow any withdrawal
by the surviving depositor without the
above certification (Sec.97, NIRC).
II. Restitution of tax upon satisfaction of
outstanding obligations
If after the payment of the estate tax, new
obligations of the decedent shall appear, and
the persons interested shall have satisfied
them by order of the court, they shall have a
right to the restitution of the proportional
part of the tax paid.
DONOR’S TAX
TAX REFUNDS
WHERE
REMEDY WHAT TO FILE TO FILE
OR
APPEAL
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
Pay-As-You-File
-the return shall be filed within 30 days after the
date the gift is made and the tax due thereon shall
be paid at the time of filing.
 The donor’s tax is paid upon filing of return.
NO extension is allowed as compared to estate
tax.
Where to Pay:
a. Resident Donor
 To an accredited agent bank, RDO, revenue
Collection Officer or duly authorized
treasurer of the city or municipality where the
donor is domiciled at the time the transfer, or
 If there be no legal residence in the
Philippines, with the Commissioner.
b. Non-resident Donor
 Philippine Embassy or Consulate in the
country where he is domiciled at the time of
the transfer, or
 Directly with the Office of the Commissioner
VAT
Every person liable to pay VAT shall file a
quarterly return of the amount of his gross sales
or receipts within twenty-five (25) days following
the close of each taxable quarter.
 The payment of the VAT shall be made on a
monthly basis.
 Taxable quarter shall mean the quarter that is
synchronized to the income tax quarter of the
taxpayer (i.e., the calendar year or fiscal year)
Return shall be filed with and tax paid (except as
the Commissioner otherwise permits):
1. to an authorized agent bank, or
2. Revenue Collection Officer, or
3. duly authorized Treasurer of the city or
municipality within the revenue district where
the taxpayer is registered or required to
register.
GROUNDS PRESCRIPTIVE PERIOD
 115

1. File refund Written claim for BIR Collection of taxes 2 yrs. from date of payment
refund is either:  Corporate TP- from the
1. erroneous filing of Final Adjusted
2. excessive Return
3. wrongful
4. unlawful  Doctrine of
Supervening Event not
applicable

Exceptions:
1.for equitable
considerations
2. the issue is similar to
one pending before the SC

 Mergers, etc.: 2 year

period from 30 days
after approval of such
plan.

2. Appeal BIR Petition for review CTA Questions of fact, 30 days from receipt of BIR
Decision under Rule 42 law, or both decision but within the 2-
yr. period.

Gibbs vs CTA
 Inaction of the BIR is
deemed to be a denial.
 File the petition within
the 2-yr. period.

3. Appeal CTA Petition for review SC Questions of law: 15 days from receipt of
Decision en banc on certiorari under Exception: decision of CTA en banc.
Rule 45 When pivotal
factual issues are
raised for the first
time on appeal to
arrive at a just
and fair decision.
(Abra Valley
College vs.
Aquino)
116 |TAXATION LAW REVIEWER

TAX REMEDIES
NIRC, AS LOCAL GOVERNMENT CODE TARIFF AND CUSTOMS CODE (PD 1464)
REMEDIES AMENDED BY (RA 7160)
RA 8424
Government Taxpayer LOCAL GOVERNMENT TAX REAL PROPERTY TAX Governm Taxpayer
Gov’t. Taxpayer Gov’t. Taxpayer ent
A. ADMINISTRATIV 1.Distraint A. Before Payment 1.Distraint 1. Question Ordinance 1. Levy 1. Appeal Assessment
E (Sec 207-212) 1. Protest (Sec 175) (Sec. 187) (Sec. 258) (Sec. 226) 1. Lien 1. Refund
(Extra-judicial) 2. Lien (Sec. 219) 2. Compromise (TCC,
3. Levy (Sec. 207 2. Lien 2. Protest (Sec. 195) 2. Lien 2. Payment under Protest 1204) 2. Protest
B) B. After Payment (Sec. 173) (Sec. 257) (Sec. 252)
1. Refund 1. 3. Refund (Sec. 196) 2. Seizure 3. Abandonment
2. Credit 3. Levy 3. Refund (Sec. 253) (2301)
(Sec 176)
APPEAL APPEAL Appeal Payment Refund PROTE
B. JUDICIAL 1. Civil Action Ordinance Protest Refund Civil ↓ ↓ ↓ 1. Civil Seizure ST
Protest Refund Civil Action ↓ ↓ ↓ Action 60days 30 days 2 yrs Action
2. Criminal Action ↓ ↓ 30 days 60 days 2 yrs ↓ ↓ ↓ Collecto Paymen
30 days 2 years ↓ ↓ ↓ LBAA LT LT r t
↓ ↓ SJ LT LT ↓ ↓ ↓ 2. ↓ ↓
BIR BIR ↓ ↓ ↓ 30days 60 days 60days Criminal 15 days 15days
↓ ↓ 30 days 30 days 30 days/ ↓ ↓ ↓ Action ↓ ↓
30 days (2 yrs) CBAA LBAA LBAA CC Collecto
30 days (2 yrs.) ↓ ↓ ↓ ↓ ↓ ↓ ↓ r
↓ ↓ RTC RTC RTC 30days 30days 30days 30days ↓
CTA CTA ↓ ↓ ↓ ↓ ↓ ↓ ↓ 15days
↓ ↓ 30 days 30 days 30 days CTA CBAA CBAA CTA ↓
15 days 15 days ↓ ↓ ↓ ↓ ↓ ↓ ↓ CC
↓ ↓ CTA CTA CTA 15 ays 30 days 30days 15days ↓
SC SC ↓ ↓ ↓ ↓ ↓ ↓ ↓ 30days
15 days 15 days 15 days SC CTA CTA SC ↓
↓ ↓ ↓ ↓ ↓ CTA
SC SC SC 15 days 15days ↓
↓ ↓ 15days
SC SC ↓
SC
PRESCRIPTIVE With prior assessment 5 yrs – No 5 yrs – No 3-yr
PERIOD Not false/Not fraudulent: (Sec. 203) Fraud Fraud period
Assessment – 3 yrs from filing of tax from
COLLECTION/ return or last day whichever is later. 10 yrs. – 10 yrs. – final
ASSESSMENT Collection – 5 years Fraud Fraud paymen
False/Fraudulent/Failure to file t
(Sec 222) (Sec. 194) (Sec. 270) (Sec.
Assessment – 10 yrs from discovery 1603)
Collection – 5 yrs. from assessment As
Without prior assessment: amende
Collection: d by RA
Not false/Not fraudulent – 5 years 9315
False/fraudulent/failure – 10 yrs.
from discovery

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012

 117

TAX REMEDIES
(under the NIRC)

(QUICK VIEW)
 118 |TAXATION LAW REVIEWER
TAXPAYER’S REMEDIES
ASSESSMENT
It is a formal notice to the taxpayer stating that
the amount thereon is due as a tax and containing
a demand for the payment thereof.
An assessment contains not only a computation of
tax liabilities but also a demand for payment
within a prescribed period (Alhambra Cigar vs.
Collector, 1959).
An affidavit, which was executed by revenue
officers stating the tax liabilities of a taxpayer and
attached to a criminal complaint for tax evasion,
cannot be deemed an assessment that can be
questioned before the CTA (CIR vs. Pascor Realty,
June 1999).
Assessment contains not only computation of tax
liabilities but also a demand for payment within a
prescribed period. (CIR vs. Pascor, 309 SCRA 402)
This action necessarily involves:
1. the computation of the sum due;
2. giving notice to that effect to the taxpayer;
and
3. the making, simultaneously with or sometime
after the giving of notice, of a demand upon
him for the payment of the tax deficiency
stated.
Notice of assessment is presumed valid. If the
taxpayer contested such a determination, the
burden of proving the determination wrong,
together with the corresponding burden of first
going forward with evidence is on the taxpayer.
(Cyanamid Philippines, Inc. vs. CA, 322 SCRA
639)
Requisites of a Valid Assessment:
1. It must be made within the prescriptive
period to assess (Sec. 203)
2. There must be a preliminary assessment
previously issued except in those instances
allowed by law (Sec. 228)
3. The TP must be informed in writing about the
facts and the law on which the assessment is
based (Sec. 228; CIR vs. Azucena T. Reyes,
2006)
4. It must be served upon TP or any of his
authorized representatives (Gabriel vs. CIR,
2004)
Assessment Notice is a formal demand sent to the
taxpayer requiring payment within a specified
time of the tax due from him including interest
and civil penalties.
Kinds of Assessments:
1. Self-Assessment - one in which the tax is
assessed by the taxpayer himself.
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
2. Deficiency Assessment - made by the tax
assessor himself whereby the correct amount
of the tax is determined after an examination
or investigation is conducted.
The liability is determined and assessed for
the following reasons:
a. amount ascertained exceeds that which is
shown as the tax by the taxpayer in his
return;
b. no amount of tax is shown in the return;
and
c. taxpayer did not file any return at all
3. Illegal and Void Assessment – tax assessor
has no power to assess at all
4. Erroneous Assessment – assessor has the
power to assess but errs in the exercise
thereof.
5. Jeopardy Assessment – tax made by an
authorized Revenue Officer without the
benefit of complete or partial audit, in the
light of the Revenue Officer's belief that the
assessment and collection of a deficiency tax
will be jeopardized by delay caused by the
taxpayer's failure to:
a. comply with the audit and investigation
requirements to present his books of
accounts and/or pertinent records, or
b. substantiate all or any of the deductions,
exemptions or credits claimed in his
return
Delinquent Tax
 When the self-assessed tax per return filed on
the prescribed date was not paid at all or was
only partially paid, or
 The deficiency tax assessed by the BIR
became final and executory.
Deficiency Tax
 The amount by which the income tax as
determined by the BIR exceeds the amount
shown as tax per return, or
 If no amount is shown or if no return is made,
then the amount by which the tax as
determined by the BIR exceeds the amounts
previously assessed (or collected without
assessment) as a deficiency.
DELINQUENCY DEFICIENCY
Failure to pay the tax The amount still due
due on the date fixed and collectible from
by law or indicated in a taxpayer upon
the assessment notice audit or
or letter of demand investigation

Distinctions between REMEDIES IN THE COLLECTION of Deficiency Tax and Delinquency Tax
DELINQUENCY TAX
Can immediately be collected administratively
through the issuance of the warrant of distraint and
levy, and by judicial action.
The filing of a civil action for its collection in the
ordinary court is a proper remedy.
Means Employed in the Assessment of Taxes (Sec.
6, CTRP)
(PEE BITS PA)
1. Examination of tax returns
2. Use of the best evidence obtainable
3. Inventory taking, surveillance and use of
presumptive gross sales and receipts
4. Termination of taxable period
5. Prescription of real property values
6. Examination of bank deposits to determine
the correct amount of the gross estate
7. Accreditation and registration of tax agents.
8. Prescription of additional procedural or
documentary requirements.
POWER OF THE COMMISSIONER TO MAKE
ASSESSMENTS AND PRESCRIBE
ADDITIONAL REQUIREMENTS FOR TAX
ADMINISTRATION AND ENFORCEMENT
 Examination of returns and determination of
tax due – assessment of the correct amount of
tax, even if the taxpayer fails to file a return;
taxpayer may amend the tax return within 3
years from date of filing, provided that no
investigation yet has been done.
 Failure to Submit Required Returns,
Statements, Reports and other Documents –
CIR shall assess the proper tax and make or
amend the return based on the best evidence
obtainable, which shall be prima facie correct
and sufficient for all legal purposes
 Authority to Conduct Inventory-taking,
surveillance and to Prescribe Presumptive
Gross Sales and Receipts
 Authority to Terminate taxable period – in
cases when taxpayer is retiring from business,
or is intending to leave the country or to
remove his property therefrom or to hide his
property, or is performing any act tending to
obstruct collection of taxes; CIR shall request
immediate payment of the tax.
 Authority of the Commissioner to
Prescribe Real Property Values – CIR’s
assessment shall be compared to the
119
DEFICIENCY TAX
Can be collected also through administrative and
judicial remedies but has to go through the
process of filing the protest against the
assessment by the taxpayer and denial of such
protest.
The filing of a civil action at the ordinary court
for collection may be subject of a motion to
dismiss. In addition, a petition for review must
be filed with the CTA within the 30 days to toll
the running of the prescriptive period.
assessment arrived to by the Provincial and
City Assessors, which fair value is higher
shall be the basis for computing any internal
revenue tax
 Authority of the Commissioner to inquire into
Bank Deposit Accounts – this is
notwithstanding any contrary provision of RA
No. 1405; applies to bank deposits of a
decedent to determine his gross estate and to
any taxpayer who entered into compromise
due to financial incapacity to pay tax liability
(with written waiver in his privilege under RA
No. 1045 on the latter case)
 Authority to Accredit and Register Tax
Agents – denied accreditation by CIR may
appealed to Sec. of Finance who shall rule
within 60 days from receipt of such appeal;
inaction of the Secretary shall be deemed
approval of application of accreditation
 Authority of the Commissioner to Prescribe
Additional Procedural or Documentary
Requirements
POWER OF THE COMMISSIONER TO OBTAIN
INFORMATION, AND TO
SUMMON/EXAMINE, AND TAKE TESTIMONY
OF PERSONS
 Authority to examine any book, paper, record
or other data relevant to the inquiry
 Authority to obtain information such as, but
not limited to, costs and volume of production,
receipts or sales and gross incomes, and
financial statements of taxpayers
 Authority to summon person liable to tax or
required to file a return, or any person having
custody of books of accounts relating to
business of the person liable to tax
 Authority to take such testimony of the person
concerned, under oath, as may be relevant or
material to such inquiry
 Authority to cause revenue officers and
employees to make a canvass of any revenue
district or region and inquire concerning all
persons therein who may be liable to pay any
internal revenue tax
 120 |TAXATION LAW REVIEWER
When is an assessment deemed made?
It is not the issue date of the demand and/or notice
that is the reckoning point in prescription but
rather it is the date when the demand letter or
notice of assessment is released, mailed or sent to
the taxpayer that constitutes an actual
assessment (Basilan Estates Inc., vs. CIR, 21
SCRA 17).
An assessment notice which is not served upon the
taxpayer or any of his authorized representatives
is not valid and the failure to protest the same
within the period provided by law (30 days from
receipt of the assessment) will
not make the assessment final, executory and
incontestable. (Estate of the late Juliana Diez vda.
De Gabriel vs. CIR, G.R. No. 155541, January 1,
2004).
Significance of Assessment on the Part of the
Government:
a. In the proper pursuit of judicial and
extrajudicial remedies to enforce taxpayer
liabilities and certain matters that relate to it,
such as the imposition of surcharges and
interests
b. In the application of Statute of Limitations
c. In the establishment of tax liens and
d. In estimating the revenues that may be
collected by the government in the coming
year (Mamalateo, Victorino Reviewer on
Taxation 2004)
Significance of Assessment on the Part of the
Taxpayer:
a. Assessment informs the taxpayer that he or
she has tax liabilities.
b. The issuance of assessment is vital in
determining the period within which to
protest it.
Principles Governing Tax Assessments:
a. Assessments are prima facie presumed
correct and made in good faith. All
presumptions are in favor of tax assessment
(Cagayan Robina Sugar Milling Co. vs. CA,
G.R. No. 122451, Oct. 12, 2000)
b. Assessments should not be based on
presumptions no matter how logical the
presumption might be, must be based on
actual facts (CIR vs. Benipayo, G.R. No. L-
13656, Jan. 31, 1962)
c. Assessment is discretionary on the part of the
Commissioner (Meralco Securities Corp. vs.
Savellano, G.R. No. L-36181 and L-36748, Oct
23, 1992)
d. The authority vested in the Commissioner to
assess may be delegated but the power to
make final assessments cannot be delegated
(City Lumber Inc. vs. Domingo, G.R. No. L-
18611, June 30, 1966)
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
e. Assessment must be directed to the right
party (Republic vs. Dela Rama, G.R. No. L-
21108, Nov. 29,1966)
Prescriptive Periods for the Assessment of Taxes
General Rule: Three years after the date the
return is due or filed, whichever is later.
Exceptions:
1. failure to file a return: ten (10) years from the
date of the discovery of the omission to file the
return;
2. false or fraudulent return with intent to evade
the tax: ten (10) years from the date of the
discovery of the falsity or fraud;
3. agreement in writing: to the extension (not
reduction) of the period to assess between the
Commissioner and the taxpayer before the
expiration of the three year period.
NOTE: The extended period agreed upon can
further be extended by a subsequent written
agreement made before the expiration of the
extended period previously agreed upon.
4. waiver or renunciation of the original three (3)
year limitation, signed by the taxpayer.
Exceptions to the Prescriptive Periods
(on Assessment and Collection)
1. False or fraudulent return, omission to file a
return (Section 222(a), NIRC)
2. If there is an agreement in writing to extend
the period to assess or to collect (Section
222(b) and (d), NIRC)
Computation of Year
A year should be computed based on the
Administrative Code. Section 31 of the
Administrative Code of 1987 provides that a “year”
shall be understood to be 12 calendar months.
Under the Civil Code, a year is equivalent to 365
days whether it be a regular year or a leap year.
Under the Administrative Code of 1987, however,
a year is composed of 12 calendar months and the
number of days is irrelevant. There obviously
exists a manifest incompatibility in the manner of
computing legal periods under the Civil Code and
the Administrative Code of 1987. For this reason,
Section 31, Chapter VII, Book I of the
Administrative Code of 1987, being the more
recent law, governs the computation of legal
periods. (Commissioner of Internal Revenue vs.
Primetime Property Group, Inc., G.R. No. 162155,
August 28, 2007)

FRAUDULENT
FALSE RETURN
RETURN
It merely implies a It is intentional and
decision from the deceitful with the aim
truth or fact whether of evading the correct
intentional or not. tax due.
Requisites of a tax return for purposes of starting
the running of the period of limitation
 the return is valid – it has complied
substantially with the requirements of the
law; and
 the return is appropriate – it is a return for
the particular tax is required by law.
NOTE: A defective tax return is the same as if no
return was filed at all.
AMENDED RETURN allowed when:
1. the amendment is made within 3 years from
the date of filing the original return; and
2. no notice of audit or investigation of such
return has, in the meantime, been actually
served upon the taxpayer.
Effect on Prescription:
 The prescriptive period starts to run from the
filing of the original return, if the same is
sufficiently complete to enable the CIR to
intelligently determine the proper amount of
tax to be assessed.
 However, where the amended return is
substantially different from the original, the
right to assess is counted from the filing of the
amended return.
Grounds for suspension of the running of
prescriptive period for assessment and collection
1. when the Commissioner is prohibited from
making the assessment or beginning the
distraint or levy or proceeding in court, and
for sixty days thereafter;
2. when the taxpayer requests for a
reconsideration which is granted by the
Commissioner;
3. when the taxpayer cannot be located in the
address given by him in the return, unless he
informs the Commissioner of any change in
his address;
4. when the warrant of distraint or levy is duly
served, and no property is located; and
5. when the taxpayer is out of the Philippines.
GENERAL PROVISIONS ON
ADDITIONS TO THE TAX
CIVIL PENALTIES OR SURCHARGE AND
INTEREST
Surcharges – not really a penalty as used in
criminal law but a civil administrative sanction
designed primarily to:
a. protect the State revenue, and
121
b. reimburse the government for the expenses in
investigating and the loss resulting from the
taxpayer’s fraud.
Penalty of 25% of the amount due for:
1. failure to file any return and pay the tax due
thereon;
2. filing a return with the wrong agent of the
BIR, unless otherwise authorized by the CIR
3. failure to pay the deficiency tax within the
time prescribed for its payment in the notice
of assessment;
4. failure to pay the full or part of the tax as
shown on the return on or before the due date.
Penalty of 50% of the amount due for:
1. willful neglect to file the return within the
period prescribed by the Code,
2. false or fraudulent return is willfully made
NOTE: In case the taxpayer, without notice
from the Commissioner or his duly authorized
representative, voluntarily files a return, only
25% surcharge shall be imposed for late filing
and late payment for the tax in lieu of the 50%
surcharge.
3. person not VAT registered issues an invoice or
receipt showing his TIN, followed by the word
“VAT”
INTEREST
a. Deficiency interest
 20% per annum from the date prescribed
for its payment until the full payment
thereof
b. Delinquency interest
 Interest of 20% or the Manila Reference
rate, whichever is higher, required to be
paid in case of failure to pay:
1. the amount of the tax due on any
return required to be filed;
2. amount of the tax due for which
return is required;
3. the deficiency tax or any surcharge or
interest thereon, on the date
appearing in the notice and demand
of the CIR
Methods of Collection of Internal Revenue Taxes:
1. Self-Assessment System
A system which relies on the honesty of
taxpayers.
 It follows the pay-as-you-file principle
 It is anchored on voluntary compliance

It is complimented by BIR Audit –
taxpayers’ honesty but not as yet.
2. Withholding Tax System
 122 |TAXATION LAW REVIEWER
The payor of the income is mandated by law to
withhold the tax.
There are two types of withholding tax :
a. Creditable Withholding Tax- it is an
advance payment of the tax due which will
be determined upon filing of the return.
This type of withholding tax compliments
the self-assessment system.
b. Final Withholding Tax – The tax withheld
is a final settlement of the payee’s tax
liability. The withholding agent becomes
directly liable in case of non-payment.
ASSESSMENT PROCESS
I. TAX AUDIT - Examination of books of
accounts and other accounting records of
taxpayers by revenue officers to determine the
correct tax liability.
Objectives of Audit:
1. To ensure that correct taxes are collected
from every taxpayer
2. To deter the commission of tax evasion
(economic theory)
3. To let taxpayers realize that tax evasion is
a serious crime which picks the pockets of
honest taxpayers
4. To enhance voluntary compliance –
Taxpayers should realize that non-
compliance is easily detected and severe
penalties are imposed
Legal Basis of Audit:
 Section 6(A), NIRC – “After a return has been
filed as required under the provisions of this
Code, the Commissioner or his duly
authorized representative may authorize the
examination of any taxpayer and the
assessment of the correct amount of tax:
Provided, however; That failure to file a
return shall not prevent the Commissioner
from authorizing the examination of any
taxpayer.”
Procedure in Conducting Audit:
 Service of Audit Notice (LA or TVN) to the
taxpayer within 30 days
 The LA must contain the following:
1. Name, address and TIN of taxpayer;
2. Name and designation of Revenue
Officers
3. Scope of the examination (Tax period and
type of tax/es)
4. Approving official
 Any erasure on the LA will render it
void
 The taxpayer must submit its Books
of Accounts and related accounting
records in his principal place of
business
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
 The examination must terminate
within 120 days
Issuance of Letter of Authority
Letter of Authority - official document that
empowers a Revenue Officer to examine and
scrutinize a taxpayer’s books of accounts and other
accounting records, in order to determine the
taxpayer’s correct internal revenue tax liabilities.
Period: Letter of Authority must be served to the
concerned taxpayer within thirty (30) days from
its date of issuance otherwise it shall be null and
void.
 Revenue officer is allowed only 120 days from
the date of receipt of a letter of authority by
the taxpayer to conduct the audit and submit
the required report of investigation.
Who may issue Letter of Authority (LOA)?
1. Commissioner - for those units reporting
directly to him;
2. Regional directors - for taxpayers covered by
his particular region. If the Commissioner has
already issued a LOA to investigate a
particular taxpayer, the Regional director
shall desist from issuing another LOA for the
same taxpayer.
Except:
a. cases involving civil or criminal tax fraud
under the jurisdiction of the tax fraud
division of the enforcement service;
b. policy cases under audit by Special Teams
in the National Office. (RAMO 36-99)
NOTE: If the taxpayer does not submit the
documents or information requested by the
BIR, the person may be required to testify or
the document may be summoned and required
to be presented to the BIR.
What are the cases which need not be covered by
a valid LOA?
 Cases involving civil/criminal tax fraud which
fall under the jurisdiction of the tax fraud
division of the Enforcement Services; and
 Policy cases under audit by the special teams
in national offices (RAMO 36-99)
Q. Can the BIR issue LOA more than once within
a taxable year?
A. NO. BIR officer are allowed to issue LOA only
once. EXCEPT:
1. when BIR determines that there is fraud
or irregularities committed by taxpayer
2. taxpayer itself requests for an
examination of his accounts
3. when there is a need to verify the
withholding taxes required by the BIR
4. when capital gains tax must be verified

POWER OF THE COMMISSIONER TO ASSESS
DEFICIENCY TAX BASED ON BEST
EVIDENCE OBTAINABLE
Sec. 6 (B) of R.A. 8424 empowers the
Commissioner to assess the proper tax and make
or amend the return based on the best evidence
obtainable (from his own knowledge and from such
information as he can obtain through testimony or
otherwise) when:
1. a report required by law as a basis for the
assessment of any national internal revenue
tax shall not be forthcoming within the time
fixed by laws or rules and regulations; or
2. there is reason to believe that any such report
is
i. false
ii. incomplete
iii. erroneous
The return made by the Commissioner, in this
instance, shall be prima facie correct and
sufficient for all legal purposes.
II. NOTICE OF INFORMAL CONFERENCE
This notice pertains to the preparation of
tentative findings and holding of informal
conference.
A Notice of Informal Conference is a written
notice informing the taxpayer that the
findings of the audit conducted on his book of
accounts and accounting records indicate that
additional taxes of deficiency assessment
have to be paid.
If, after the culmination of an audit, a
Revenue Officer recommends the imposition
of deficiency tax assessments, this
recommendation is communicated by the
Bureau to the taxpayer concerned during an
informal conference called for this purpose.
The taxpayer shall then have fifteen (15) days
from the date of his receipt of the Notice for
Informal Conference to explain his side.
Matters are taken up during the Informal
Conference:
1. Discussion on the merits of the assessment
2. Attempt of taxpayer to convince the examiner
to conduct a re-investigation and/or re-
examination
3. Evaluate if submission of the waiver of the
statute of limitations is necessary - because
evaluation may extend beyond three years
4. Taxpayer to advise the examiner if position
paper will be submitted.
Soon after the completion of the tax audit, the
revenue officer will render a written report
stating:
a. the factual and legal basis of his findings;
123
b. whether the taxpayer agrees with his
findings.
If the taxpayer is not amenable, the taxpayer shall
be informed in writing by the Revenue District
Officer or by the Chief of the Division of the
discrepancies in the taxpayer’s liability for the
purpose of informal conference, in order to afford
the taxpayer with an opportunity to present his
side of the case.
NOTE: If the taxpayer fails to respond within 15
days from date of receipt of the notice for informal
conference, he shall be considered in default.
In such a case, the Revenue District Officer of the
Chief of the Division shall endorse the case to the
Assessment Division for review and issuance of
deficiency tax assessment, if warranted.
Requisites of an agreement waiving the statute of
limitations:
1. Entered before the expiration of the 3-year
period for assessment of the tax;
2. In writing;
3. Signed by taxpayer;
4. Must specify a definite agreed date between
within which to assess and collect taxes;
5. Signed and accepted by the CIR or his duly
authorized representative;
6. Date of acceptance must be indicated. (RMC
No. 06-05)
III. ISSUANCE OF PRELIMINARY
ASSESSMENT NOTICE (Pan)
It is a communication issued by the Regional
assessment Division, or any other concerned
BIR office, informing a taxpayer who has been
audited of the findings of the BIR officer
following the review of these findings.
It must show in detail:
1. amount to be paid
2. the facts and law on which the proposed
assessment is based
3. jurisprudence
4. demand to pay
NOTE: absent of any of the information above-
mentioned would make the PAN void.
REPLY TO PAN
If the taxpayer disagrees with the findings
stated in the PAN, he shall then have 15 days
from his receipt of the PAN to file a written
reply contesting the proposed assessment.
Exceptions to Issuance of PAN
a. When the finding for any deficiency tax is
the result of mathematical error in the
computation of the tax appearing on the
face of the tax return filed by the taxpayer;
 124 |TAXATION LAW REVIEWER
b. when a taxpayer who opted to claim a
refund or tax credit of excess creditable
withholding tax for a taxable period was
determined to have carried over and
automatically applied the same amount
claimed against the estimated tax
liabilities for the taxable quarter or
quarters of the succeeding taxable year;
c. when a discrepancy has been determined
between the tax withheld and the amount
actually remitted by the withholding
agent;
d. when an excise tax due on excisable
articles has not been paid; or
e. when an article locally purchased or
imported by an exempt person, such as,
but not limited to vehicles, capital
equipment, machineries, and spare parts,
has been sold, treated or transferred to
non-exempt persons. (Rev. Reg. No. 12-99)
IV. ISSUANCE OF FORMAL ASSESSMENT
NOTICE (FAN) and Letter Of Demand
Final Assessment Notice (FAN) is a declaration
of deficiency taxes issued to a taxpayer who
fails to respond to a pre-assessment notice
within the prescribed period of time, or whose
reply to the PAN was found to be without
merit.
An assessment contains not only a computation
of tax liabilities, but also a demand for
payment within a prescribed period. The
ultimate purpose of assessment is to ascertain
the amount that each taxpayer is to pay. An
assessment is a notice to the effect that the
amount therein stated is due as tax and a
demand for payment thereof. (Tupaz vs. Ulep,
1999)
The formal letter of demand shall be issued by
the Commissioner or his duly authorized
representative. The letter of demand calling for
the payment of the taxpayer’s deficiency taxes
shall state:
1. the FACTS,
2. the LAW, RULES and REGULATIONS or
JURISPRUDENCE on which the
assessment is based,
3. OTHERWISE, the formal letter of demand
or assessment notice shall be VOID. (RR 12-
99)
NOTE: A follow-up letter/demand letter for
payment of taxes is considered a notice of
assessment (Republic vs. CA and Nielson & Co.
April 30, 1987).
If the taxpayer fails to respond within 15 days
from date of receipt, he shall be considered in
default.
In such a case, a formal letter of demand and FAN
shall be issued, calling for payment of the
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
deficiency tax liabilities, inclusive of penalties. It
shall be sent personally or through registered
mail.
DISPUTED ASSESSMENT
REMEDIES OF A TAXPAYER
1. Administrative Remedies
a. before payment
i. protest
ii. entering into a compromise
b. after payment – filing of claim for refund
or tax credit within two years from date
of payment regardless of any supervening
cause.
2. Judicial Remedies
a. civil action
i. appeal to CTA – within 30 days from
receipt of decision on the protest or
from the lapse of 180 days due to
inaction of the Commissioner;
ii. action to contest forfeiture of chattel;
and
iii. action for damages
b. criminal action
i. Filing of criminal complaint against
erring BIR official and employee; and
ii. Injunction – when the CTA in its
opinion, considers that the collection
by the BIR may jeopardize taxpayer
ADMINISTRATIVE REMEDIES
Taxpayer’s Remedies Against an Assessment:
Remedy before payment – This comes in the form
of administrative protest which can either be:
1. Request for reconsideration, or
2. Request for re-investigation
Remedy after payment – Claim for refund of
erroneously paid taxes pursuant to Section 204
and Section 229
PROTESTING ASSESSMENT
Protest is a vital document which is a formal
declaration of resistance of the taxpayer. It is a
repository of all arguments. It can be used in court
in case of administrative remedies have been
exhausted. It is also formal act of the taxpayer
questioning the official actuation of the CIR. This
is equivalent to a pleading.
1. File a request for reinvestigation or
reconsideration within 30 days from receipt of
the assessment.
REQUEST FOR REINVESTIGATION

It is a plea for re-evaluation of an assessment
on the basis of newly- discovered or additional
evidence that a taxpayer intends to present in
the reinvestigation. It involves a question of
fact or law or both.
REQUEST FOR RECONSIDERATION
It is a plea for re-evaluation of the assessment
on the basis of existing records without need
of additional evidence. It involves a question
of fact or law or both. (Revenue Regulation No.
12-85)
Request for Reconsideration vs. Request for
Reinvestigation
A request for reconsideration involves re-
evaluation of assessment based on existing
records, while a request for reinvestigation
entails presentation of newly-discovered or
additional evidence.
The latter suspends the running of the
prescriptive period while the former does not.
(Revenue Regulation 12-85)
Q: What kind of protest shall toll the running
of the prescriptive period?
A: A request for reinvestigation, and not a
request for reconsideration, will suspend the
running of the period to collect. A
reinvestigation, which entails the reception
and evaluation of additional evidence, will
take more time than a reconsideration of a tax
assessment, which will be limited to the
evidence already at hand; this justifies why
the former can suspend the running of the
statute of limitation on collection of the
assessed tax, while the letter cannot.
(Commissioner of Internal Revenue vs.
Philippine Global Communication, Inc., G.R.
No. 167146, October 31, 2006 reiterating BPI
vs. CIR, G.R. No. 139736)
 Under Section 228 of the 1997 Tax Code,
the taxpayer had 30 days to appeal the
denial of its protest to the CTA. Since the
denial of the administrative protest on
August 4, 2005, it had until September 3,
2005 to file a petition for review before the
CTA Division. It filed one, however, on
October 20, 2005, hence, it was filed out of
time because a motion for reconsideration
of the denial of the administrative protest
does not toll the 30-day period to appeal to
the CTA. (Fishwealth Canning
Corporation vs.
CIR, G.R. No. 179343, January 21, 2010)
2. Within 60 days from filing of protest, all
relevant supporting documents should have
125
been submitted, otherwise, the assessment
shall become FINAL (cannot be appealed) (Sec.
228 NIRC)
NOTE: Such documents which the taxpayer feels
would be necessary to support his protest and not
what the Commissioner feels should be submitted,
otherwise, taxpayer would always be at the mercy
of the BIR which may require production of such
documents which taxpayer could not produce.
(Standard Chartered Bank vs. CIR, CTA Case No.
5696, August 16, 2001)
A protest is considered validly made if it satisfies
the following conditions:
1. It is made in writing, and addressed to the
Commissioner of Internal Revenue.
2. It contains the information the following
information (from RR 12-85):
 Name of the taxpayer and address for the
immediate past three taxable years
 Nature of request whether reinvestigation
or reconsideration specifying newly-
discovered evidence he intends to present if
it is a request for reinvestigation
 The taxable periods covered
 Assessment number
 Date of receipt of assessment notice or letter
of demand
 Itemized statement of the findings to which
the taxpayer agrees as a basis for
computing the tax due, which amount
should be paid immediately upon the filing
of the protest. For this purpose, the protest
shall not be deemed validly filed unless
payment of the agreed portion of the tax is
paid first
 The itemized schedule of the adjustments
with which the taxpayer does not agree
 A statement of facts and/or law in support
of the protest.
3. It states the FACTS, applicable LAW, RULES
and REGULATIONS or JURISPRUDENCE
on which his protest is based, otherwise the
protest shall be considered void and without
force and effect.
4. It is filed within the period prescribed by law
RENDITION OF DECISION BY
COMMISSIONER
1. Denial of Protest
CIR’s actions equivalent to denial of protest:
a. Filing of criminal action against taxpayer
b. Issuing a warrant of distraint and levy
2. Inaction by Commissioner
REMEDIES OF TAXPAYER TO
 126 |TAXATION LAW REVIEWER
ACTION BY COMMISIONER
1. If the Commissioner DENIES THE PROTEST
filed by the taxpayer- he may appeal to the
Court of Tax Appeals within (30) thirty days
from receipt of the decision denying the protest.
Where there is a request for reconsideration,
final demand letter from BIR is considered a
decision on a disputed or protested assessment
which is therefore appealable to the CTA (CIR
vs. Isabela Cultural Corp, July 11, 2001).
The 30-day period to appeal is jurisdictional
and failure to comply therewith would bar the
appeal and deprive the CTA of jurisdiction to
entertain and determine the correctness of the
assessment (RCBC vs. CIR, G.R. No. 168498,
April 24, 2007).
Alternative remedies of TP against CIR’s
inaction:
a. To file a petition for review with the CTA
within 30 days after the expiration of the
180-day period to act.
b. To await the final decision of the CIR (till
kingdom come) and appeal within 30 days
after receipt of a copy of the decision.
These options are mutually exclusive. Resort to
one bars the application of the other. (RCBC vs.
CIR, G.R. 168498, April 24, 2007)
2. If the Commissioner did NOT ACT UPON
THE PROTEST within one hundred and
eighty days from the time the documents
were submitted - the taxpayer may
either:
 Appeal to the CTA within thirty days
from the lapse of the 180- day period OR
 Wait until the Commissioner decides
before he elevates the case to the CTA
Effect of Failure to Protest
If #1 occurs and the taxpayer does not file a
protest within the prescribed period, the
assessment becomes FINAL, EXECUTORY and
DEMANDABLE. But if #2 occurs and the taxpayer
does not file a protest within the prescribed period,
the assessment DOES NOT become FINAL,
EXECUTORY and DEMANDABLE.
Inaction by Commissioner
In cases of inaction by the Commissioner, Section
228 of the Tax Code merely gave the taxpayer an
OPTION:
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
1. The taxpayer may appeal to the Court of Tax
Appeals within thirty days from the lapse of
the 180-day period, or
2. He may wait until the Commissioner decides
on his protest before he elevates his case.
In case the Commissioner failed to act on the
disputed assessment within the 180-day period
from date of submission of documents, a taxpayer
can either: 1) file a petition for review with the
Court of Tax Appeals within 30 days after the
expiration of the 180-day period; or 2) await the
final decision of the Commissioner on the disputed
assessments and appeal such final decision to the
Court of Tax Appeals within 30 days after receipt
of a copy of such decision.
However, these options are mutually exclusive,
and resort to one bars the application of the other.
As such, where a taxpayer after availing the first
option, i.e., filing a petition for review which was
however filed out of time, it cannot successfully
resort to second option, i.e., awaiting the final
decision on the disputed assessment because of the
Commissioner’s inaction. (RCBC vs. Commission
of Internal Revenue, G.R. No. 168498, April 24,
2007)
The taxpayer was given this option so that in case
his protest is not acted upon within 180 days, he
may be able to seek immediate relief and need not
wait for an indefinite period of time for the
Commissioner to decide. But if he chooses to wait
for a positive action on the part of the
Commissioner, then the same could not result in
the assessment becoming final, executory and
demandable. (Lascona Land Co vs. CIR, January
4, 2000)
When does the 30-day period to appeal commence
to run?
The 30-day period starts when the taxpayer
receives the decision of the Commissioner denying
the protest.
The appealable decision is the decision of the
Commissioner denying the protest, NOT the
warrants of distraint or levy. (Advertising
Associates vs. CA December 26, 1984)
 The decision of the Commissioner must
categorically state that his action on the
disputed assessment is final; otherwise period
to appeal will not commence to run.
NOTE: A Division of the CTA shall hear the
appeal. (Sec. 11, RA 1125 as amended by RA 9282
[2004])
If the taxpayer is not satisfied with the CTA
Division’s ruling, what is his REMEDY?
 127

He may file a Motion for Reconsideration before I. Distraint of Property

the same Division of the CTA within fifteen (15)
days from notice thereof (Sec. 11, RA 1125 as The collection of taxes is enforced on the goods,
amended by RA 9282 [2004]). chattels or effects and other personal property,
including stocks and other securities, debts,
 A party adversely affected by a resolution of a credits and interest and rights to personal
Division of the CTA on a motion for property.
reconsideration may file a Petition for Review
with the CTA en banc (Sec. 18, RA 1125 as WHO may Effect Distraint?
amended by RA 9282 [2004]). a. Commissioner or his duly authorized
representative, if the amount involved is
If the taxpayer is not satisfied with the decision of more than P1,000,000.00
the CTA en banc, what is his REMEDY? b. Revenue District Officer, if the amount
A party adversely affected by a decision or ruling involved is P1,000,000.00 or less
of the CTA en banc may file with the Supreme
Court a verified petition for review on certiorari Requisites of Distraint:
pursuant to Rule 45 of the 1997 Rules of Court 1. the taxpayer must be delinquent (except in
(Sec. 19, RA 1125 as amended by RA 9282 [2004]). constructive distraint) in the payment of
tax;
Effect of failure to appeal: The decision shall be 2. there must be a subsequent demand for its
final, executory and demandable. payment (assessment);
3. the taxpayer fails to pay the tax at the time
COLLECTION OF TAXES required; and
4. the period within which to assess or collect
Prescriptive Period for the Collection of Taxes the tax has not yet prescribed.
1. If there is an assessment, the period shall be
five (5) years from the date of assessment Kinds of Distraint
(Section 222(c), NIRC). This rule is believed to 1. Actual Distraint
cover by implication regular assessments, 2. Constructive Distraint
otherwise, the period to collect an assessment
issued under normal circumstances will be ACTUAL CONSTRUCTIVE
imprescriptible. DISTRAINT DISTRAINT
2. In the absence of an assessment, and a return Made only on the Made on the property
was filed as long as it is not false or fraudulent, property of a of any taxpayer
the period is five (5) years from the date the tax delinquent taxpayer whether delinquent
is due. or not
3. If no return was filed, the period to collect is There is taking of The taxpayer is
within ten (10) years from the date of discovery possession. merely prohibited
of the omission to file without need for an from disposing of his
assessment (Evangelista vs. Collector, October property.
15, 1957; Section 222(a), NIRC). Effected by leaving a Effected by requiring
4. If the return filed was false or fraudulent, list of distraint the taxpayer to sign a
collection maybe resorted to without need of property or by service receipt of the property
assessment within ten (10) years from of a warrant or or by the revenue
discovery of the fraud or falsity (Ungab vs. distraint or officer preparing and
Cusi, 97 SCRA 887; Section 222(a), NIRC). garnishment leaving a list of such
property
An action filed by Bureau of Customs against a An immediate step for Not necessarily so
bonding company to collect on a bond used to collection of taxes
secure payment of taxes is not a tax collection case
but rather a simple case of enforcement of a ACTUAL DISTRAINT
contractual liability. Hence, appellate jurisdiction There is taking of possession of the property from
over the case properly lies with the Court of the taxpayer by the government.
Appeals rather than the Court of Tax Appeals
(Phil. British Assurance Co., Inc. vs. Republic of It is resorted to when at the time required for
the Philippines, G.R. No. 185588, February 2, payment, a person fails to pay his delinquent tax
2010) obligation.

Effected by:
ADMINISTRATIVE REMEDIES a. leaving a list of the distrained property, or
OF THE GOVERNMENT b. by service of a warrant of distraint or
garnishment
 128 |TAXATION LAW REVIEWER

Procedure: 1. sign a receipt covering property

a) Goods, effects, chattels and other personal distrained
property 2. obligate himself to preserve the same
1. a copy of an account of the property intact and unaltered
distrained, signed by the officer, shall be 3. not to dispose of the property in any
left either from the owner or the person manner, without the authority of the
from whom the property was taken or at Commissioner
the dwelling or place of business of such b) Where taxpayer or person in possession
person and with someone of suitable age refuses to sign:
and discretion 1. distraining officer shall prepare a list of
2. statement of the sum demanded the property distrained
3. time and place of sale 2. in the presence of 2 witnesses, leave a
copy in the premises where the property
b) Stocks and other Securities is located (Sec. 206, NIRC).
By serving a copy of the warrant upon the
taxpayer AND upon the president, manager, LIEN DISTRAINT
treasurer or other responsible officer of the Directed against the Need not be directed
issuing corporation, company, association property subject to against the property
the tax subject to the tax
c) Debts and Credits Regardless of the Property seized must
1. leaving a copy of the warrant with owner of the property be owned by the
the person owing the debts or having taxpayer.
in his possession such credits or his
agent II. Summary Levy on Real Property and Sale of
2. warrant shall be sufficient authority Property
to pay the Commissioner the amount
of such debts or credits It refers to the act of seizure of real property in
order to enforce the payment of taxes.
d) Bank accounts (garnishment)
1. serve a warrant of garnishment upon the The requisites for the exercise of the remedy of
taxpayer AND upon the president, levy are the same as in the remedy of distraint.
manager, treasurer or other responsible
officer of the bank When: before, simultaneously or after the
2. bank shall turn over to the Commissioner distraint of personal property belonging to the
so much of the bank accounts as may be taxpayer
sufficient (Sec. 208, NIRC)
Effected by:
NOTE: Report on the Distraint by the distraining a. writing upon an authenticated certificate
officer must be submitted within 10 days from showing:
receipt of the warrant to the Revenue District 1. the name of the taxpayer
Officer and to the Revenue Regional Director. The 2. amounts of the tax and penalty due
Order of Distraint may be lifted by the 3. description of the property upon which
Commissioner or his representative. (Sec. 207 (a), levy is made
NIRC)
b. written notice of the levy shall be mailed to
CONSTRUCTIVE DISTRAINT or served upon:
The type of distraint wherein the owner is merely 1. the Register of Deeds of the province or
prohibited from disposing of this property city where the property is located, and
 issued even when there is no actual tax 2. the delinquent taxpayer
delinquency 3. if he is absent from the Philippines, to
 availed of when taxpayer is: his agent or the manager of the
a. retiring from any business subject to tax; business in respect to which the
b. intending to – liability arose
b.1. leave the Philippines; or 4. if there be none, to the occupant of the
b.2. remove his property therefrom; or property in question
b.3. hide or conceal his property; or

The remedy by distraint and levy may be repeated

c. he performs any act tending to obstruct the if necessary until the full amount, including all
proceedings for collecting the tax due expenses, is collected.

Procedure: Procedure:
a) Require the taxpayer or any person having a) Internal revenue officer shall prepare a duly
control of the property to authenticated certificate showing the name of

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012


taxpayer, amounts of tax and penalty due,
enforceable throughout the Philippines
b) Officer shall write upon the certificate a
description of the property upon which levy is
made
c) Written notice of levy shall be mailed or
served upon
1. the Register of Deeds where the property
is located and
2. the taxpayer or agent/manager of the
business in respect to the tax liability or to
the occupant of the property
d) If personal property of taxpayer is not
sufficient to satisfy the tax due, levy on real
property shall proceed within 30 days after
distraint.
e) Report on levy
1. by levying officer
i. submitted within 10 days from
receipt of warrant
ii. submitted to the Commissioner or his
representative
2. by the Revenue Regional Director--
consolidated report, as may be required
by the Commissioner
f) The warrant may be lifted by the
Commissioner or his representative
Sale of Property
1. In case of distrained property:
a. notification specifying the time and place
of sale and the articles distrained shall be
exhibited
 in not less than 2 public places (one
place shall be at the office of the
Mayor)
 in the municipality or city where the
distraint is made
IV. Forfeiture of Government for Want of Bidder
b. The time of sale shall not be less than 20
days after notice to the owner or
possessor of the property and the
publication or posting of such notice
c. Sale of the property at
 public auction to the highest bidder for
cash, or
 through duly licensed commodity or
stock exchanges, with the approval of
the CIR
2. In case of levied property:
a. advertisement of the time and place of
sale of the taxpayer’s property or so
much thereof as may be necessary to
satisfy the claim within 20 days after the
levy, and it shall cover a period of at least
30 days
 posting a notice at the main entrance
of the municipal building or city hall
and in a public and conspicuous place
129
in the barrio or district in which the
real estate lies and
 by publication once a week for 3 weeks
in a newspaper of general circulation
in the municipality or city where the
property is located
b. sale at public auction to the highest
bidder
 at the main entrance of the municipal
building or city hall, or
 on the premises to be sold, as the
officer conducting the proceedings
shall determine and as the notice shall
specify
c. disposition of proceeds of sale
In case the proceeds of the sale exceed the
claim (taxes, penalties, and interest) and
cost of the sale, the excess shall be turned
over to the owner of the property.
Redemption by the Taxpayer
Within 1 year from the date of sale, that is, from
the registration of the registration of the deed of
sale. By the taxpayer or anyone for him by paying
the full amount of:
 Taxes
 Penalties
 Interests, and
 Costs of sale
Pending redemption of the property sold, the
owner shall:
1. not be deprived of the possession of the
property
2. be entitled to the rents and other income
thereof
Effected when:
1. there is no bidder for the real property in the
public sale, or
2. if the amount of the highest bid is
insufficient to pay the taxes, penalties and
costs
The Register of Deeds concerned shall:
1. Upon registration of the declaration for
forfeiture, transfer the title of the property to
the government
2. Without the necessity of an order from a
competent court
Enforced by:
1. In case of personal property
 seizure and
 sale or destruction of the property
2. In case of real property
 judgment of condemnation and
 130 |TAXATION LAW REVIEWER
 sale in a legal action or proceeding, civil
or criminal, as the case may require
Redemption of the Property Sold
 Same as that of redemption in case of sale
 The one-year period starts from the date of
registration of the declaration of forfeiture.
 If the property is not redeemed, the forfeiture
shall become absolute
V. Tax Lien
A legal claim or charge on property of the
taxpayer as security for the payment of some
debt or obligation. It accrues when the
taxpayer neglects or refuses to pay his tax
liability after demand with interests, penalties,
and costs that may accrue in addition thereto.
Extent – upon all property and rights to
property belonging to the taxpayer attaches
not only from the time the warrant was served
BUT from the time tax was due and
demandable.
The lien is not valid against any mortgagee,
purchaser, or judgment creditor until notice of
such lien shall have been filed in the register of
deeds of the province or city where the property
is located. But it is effective against third
persons only when notice of such lien is filed by
the Commissioner in the Register of Deeds in
the province/ city where the property is
situated. (Sec. 219)
NOTE: Superior to judgment claim of private
property.
VI. Compromise And Abatement
Compromise is a contract whereby the parties
by reciprocal concessions, avoid litigation or
put an end to one already commenced
Requisites:
1. the taxpayer must have a tax liability;
2. there must be an offer (by the taxpayer of
an amount to be paid him)
3. there must be acceptance (by the
Commissioner or taxpayer as the case may
be) of the offer in the settlement of the
original claim;
Officers authorized to compromise:
1. Commissioner of Internal Revenue is the
only official vested with such power and
discretion;
2. Subordinate officials may preliminarily
enter into compromise.
Effects:
a. acceptance of an offer of compromise: not
final and may be reviewed by the
Commissioner;
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
b. rejection of an offer of compromise: final
and binding unless revoked or set aside by
the Commissioner
Compromise of CIVIL CASES
Grounds:
a. when a reasonable doubt as to the validity of
the claim against the taxpayer exists
b. when the financial position of the taxpayer
demonstrates a clear inability to pay the
assessed tax
Limitation as to amount:
1. In case of financial incapacity: 10% of the basic
assessed tax
2. Other cases: 40% of the basic assessed tax
The approval of the Evaluation Board (composed
of the CIR and the Deputy Commissioners) is
required when:
1. The basic tax involved exceeds P1,000,000; or
2. The settlement offered is less than the MCR
NOTE: The MCR may be less than the prescribed
rates of 10%, 20% or 40%, as the case may be,
provided it is approved by the Evaluation Board.
Limitation as to coverage:
1. With respect to the liability of the taxpayer for
surcharges as their imposition is mandatory
2. In cases finally decided by the courts
Compromise in CRIMINAL VIOLATIONS
General Rule:
All criminal actions may be compromised.
Exceptions:
a. those already filed in court
b. those involving fraud
Extent of discretion:
1. before the complaint is filed with the
prosecutor’s office: The Commissioner has full
discretion to compromise except those
involving fraud;
2. after the complaint is filed with the
prosecutor’s office but before the information is
filed with the court: The Commissioner can still
compromise provided the prosecutor
consented;
3. after the information is filed with the court:
The Commissioner is no longer permitted to
compromise with or without the consent of the
prosecutor.
Remedies when taxpayer refuses or fails to abide
by a tax compromise:
1. enforce the compromise
a. judicial compromise can be enforced by
mere execution
b. extrajudicial can only be enforced by
court action

2. regard it as rescinded and insists upon
original demand (Art. 2041, NCC)
Compromise Penalty
It is an amount which the taxpayer pays to
compromise a tax violation
 paid in lieu of criminal prosecution.
A taxpayer cannot be compelled to pay a
compromise penalty.
If he does not want to pay, the CIR must institute
a criminal action.
ABATEMENT pertains to the cancellation of the
tax liability.
General Rule: The power to compromise and abate
cannot be delegated by the CIR.
Exceptions:
a. assessments issued by regional offices
involving basic taxes of Php500,000 or less; and
b. minor criminal
Grounds:
1. When the tax assessed or any portion thereof
appears to be unjustly or excessively
demanded, or
2. When the administration and collection costs
involved do not justify the collection of the
amount due
JUDICIAL REMEDIES OF THE
GOVERNMENT
I. Civil Actions
These are actions instituted by the government
to collect internal revenue taxes. It includes
filing by the government with the probate court
claims against the deceased taxpayer.
Enforced by:
1. filing a civil case for the collection of a sum of
money with the proper regular court (i.e.
MTC or RTC); or
2. filing an answer to the petition for review
filed by the taxpayer with the CTA
A. Civil actions filed with ordinary courts
Resorted to only when tax becomes:
1. delinquent
2. collectible
COLLECTIBILITY arises when:
a. Self-assessed tax shown in the return was
not paid within the date prescribe by law;
b. Final assessment is not protested
administratively within 30 days from date of
receipt;
c. Non-compliance with the condition laid in
the approval of protest;
131
d. Failure to file a timely appeal to the CTA on
the final decision of the CIR or his authorized
representative on the disputed assessment.
Defenses Precluded by Final and Executory
Assessments:
1. invalidity or illegality of the assessment; and
2. prescription of the government’s right to
assess
B. Civil actions filed with the CTA
The fact that no civil action was filed before
the ordinary courts to collect the tax liability
is no ground for claiming that the right to
collect had already prescribed.
The answer filed by the government in the CTA
is tantamount to the filing of a civil action for
collection the regular court and has the effect of
tolling the prescriptive period (Hermanos, Inc. vs.
CIR, 29 SCRA 552).
II. Criminal Actions
Prescriptive Period for the Filing of Criminal
Action: five (5) years from the day of the
commission of the violation, and if not known,
from the discovery thereof and the institution of
judicial proceedings for its investigation and
punishment.
Grounds for Interruption of the Period:
1. When proceedings are instituted against
the guilty persons – It begins to run again
if the proceedings are dismissed for
reasons not constituting jeopardy.
2. When the offender is absent from the
Philippines
Two (2) common crimes punishable under the Tax
Code:
1. Attempt to evade or defeat a tax
Any person who willfully attempts in any
manner to evade or defeat any tax or the
payment thereof shall, in addition to other
penalties provided by law, upon conviction
thereof, be punished.
The conviction or acquittal shall not be a bar
to the filing of a civil suit for the collection of
taxes.
2. Failure to file return, supply correct and
accurate information, pay tax, withhold and
remit tax and refund excess taxes withheld
on compensation
Any person required under the Tax Code:
a. to pay any tax make a return
b. keep any record
c. supply correct and accurate
information
d. withhold or remit taxes withheld
 132 |TAXATION LAW REVIEWER
e. refund excess taxes withheld on
compensation
f. who willfully violates these
duties at the time or times required by
law shall be punished upon conviction
in addition to other penalties.
Prima Facie Evidence of a False or Fraudulent Return
1. substantial under-declaration of taxable
sales, receipts or income OR a substantial
overstatement of deduction, as determined by
the Commissioner pursuant to the rules and
regulations promulgated by the Secretary of
Finance;
2. failure to report sales, receipts or income in an
amount exceeding 30% of actual deductions
constitutes substantial overstatement of
deductions.
NOTES:
No civil or criminal action for the recovery of
taxes or the enforcement of any fine, penalty
or forfeiture under this Code shall be filed in
court without the approval of the
Commissioner.
The approval of the Commissioner required
for the judicial enforcement of tax liability is
not jurisdictional; lack of such approval
merely affects the cause of action or capacity
to sue.
When the civil action arising out of a tax
delinquency is extinguished by prescription, it
is still possible for such tax to be collected by
criminal action inasmuch as actions of this
kind prescribe only after the lapse of 5 years
counted from the discovery of the crime.
An assessment is not necessary before a
criminal charge can be filed provided there is
a prima facie showing of a willful attempt to
evade taxes.
3. Recurrence of understatement of income or
overstatement of deductions for more than
one taxable year.
TAX REFUND
Grounds:
1. tax is collected erroneously or illegally
2. penalty is collected without authority
3. sum collected is excessive
Requisites:
 Claim for refund partakes of the nature of an
exemption which cannot be allowed unless
granted in the most categorical language.
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
 It must be strictly construed against the
claimant and such claimant has the burden of
proving that the following requirements were
met:
1. There must be a written claim for refund filed
by the taxpayer with the Commissioner
This is mandatory requirement; in the
absence of this requirement, the
Commissioner is without any authority to
refund (Andrea Vda. De Aguinaldo vs.
Commissioner, 13 SCRA 269).
2. The claim for refund must be a categorical
demand for reimbursement
While payment protest is not necessary,
the claim for refund must categorically
demand for reimbursement of the
overpaid amount.
3. It must be filed with the commissioner within
two years (2) after the payment of the tax or
penalty;
General Rule: from the date of payment,
regardless of any supervening cause that may
arise after payment:
Exceptions:
Corporate Income tax - where a corporation
paid quarterly income taxes in any of the first
3 quarters during the taxable year but incurs
a net loss during the taxable year, the 2-year
period for the filing of the claim for refund or
credit shall be counted from the date of the
filing of the annual corporate ITR.
Income tax paid in installments - where the
tax paid had been paid in installment, the
taxes are deemed paid, for purposes of
determining the commencement of the 2-year
period for filing a written claim for the refund
or credit therefore on the date the last
installment was paid (CIR vs. Prieto, No. L-
11976, August 29, 1961).
NOTE:
A return filed showing an overpayment shall be
considered as a written claim for credit or refund.
In case of payments effected through the
withholding tax system, it is from the end of the
taxable year then, or when the taxability falls
due, that the two-year prescriptive period starts to
run (Gibbs vs. CIR, No. L-17406, November 29,
1965).
4. Show Proof of Payment
Proper Person to Claim Refund or Credit - the
person to whom the tax is imposed by the statute
(Weatern Minolco Mining Corp. vs. Plana, CTA
Case No. 3011, May 21, 1982).

The withholding agent (of nonresident foreign
corporations) is constituted the agent of both the
Government and the taxpayer. With respect to the
collection of and/or withholding of the tax, he is the
government’s agent, and with regard to the filing
of the necessary income tax and the payment of
the tax to the Government, he is the agent of the
taxpayer. Hence, it may be assessed for deficiency
withholding tax at source; as Philippine
counterpart, it is therefore the proper entity who
should claim for the refund (CIR vs. Wander
Philippines, No. L-68375, April 15, 1988).
Prescriptive Period for the Filing of Claims for
Tax Refunds
General Rule: Both the administrative and
judicial claims must be filed within two years from
the filing of the tax returns subject to a claim.
Exception: Claims involving refunds of excess
input VAT must be filed with the Bureau of
Internal Revenue (BIR) and with the courts within
two years from the close of the taxable quarter
when the relevant sales were made regardless of
when the input VAT was paid under Sec. 112 of
the Tax Code. (Commissioner of Internal Revenue
vs. Mirant Pagbilao Corporation, G.R. No. 172129,
September 12, 2008)
Q: Are all refunds in the nature of tax exemptions?
A: No. A tax refund may only be considered as a
tax exemption when it is based either on a tax-
exemption statute or a tax-refund statute. Tax
refunds or tax credits are not founded principally
on legislative grace, but on the legal principle of
quasi-contracts against a person’s unjust
enrichment at the expense of another. The
erroneous payment of tax as a basis for a claim of
refund may be considered as a case of solutio
indebiti, which the government is not exempt from
its application and has the duty to refund without
any unreasonable delay what it has erroneously
collected. (Commissioner of Internal Revenue vs.
Fortune Tobacco Corp., G.R. No. 167274-75, July
21, 2008)
Taxes withheld on certain payments under the
creditable withholding tax system are but
intended to approximate the tax due from the
payee. The withheld taxes remitted to the BIR are
treated as advance on the actual tax liability of the
taxpayer, subject to adjustment at the proper time
when the actual tax liability can be fully and
finally determined. Even if the law does not
expressly state that Ironcon’s excess creditable
VAT withheld is refundable, it may be the subject
of a claim for refund as an erroneously collected
tax. Substantial justice dictates that the
government should not keep money that does not
belong to it at the expense of citizens. (CIR vs.
133
Ironcon Builders and Development Corporation,
G.R. No. 180042, February 8, 2010)
Proper Party to Claim a Refund for the Excise
Taxes Paid
The proper party to question, or claim a refund or
tax credit of an indirect tax is the statutory
taxpayer, which is Petron in this case, as it is the
company on which the tax is imposed by law and
which paid the same even if the burden thereof
was shifted or passed on to another.
Excise tax on petroleum is an indirect tax.
Although the burden to pay an indirect tax can be
passed on to the purchaser of the goods, the
liability to pay the indirect tax remains with the
petroleum manufacturer or seller. When the
manufacturer or seller decides to shift the burden
of the excise tax to the tax-exempt purchaser, the
tax becomes a part of the price of the commodity.
Thus, in this case, the petroleum manufacturer
who is the statutory taxpayer is the proper party
to claim refund. (Silkair (Singapore) PTE. Ltd. vs.
Commissioner of Internal Revenue, G.R. Nos.
171383 & 172379, November 14, 2008)
Silkair should have timely submitted a valid
exemption certificate to Petron in order that
Petron will not pass on the excise tax to petitioner.
It should have invoked its tax exemption to Petron
before buying the aviation
jet fuel. Petron, however, remains the statutory
taxpayer on those excise taxes. (Ibid.)
Failure to indicate a choice to avail of either the
tax refund or tax credit in the annual ITR is not
fatal to a claim for refund and should not bar the
availment of such remedy. While a taxpayer is
required to mark its choices in the form provided
by the BIR, this requirement is only for the
purpose of facilitating tax collection. A taxpayer
that makes a choice expresses certainty or
preference and this demonstrates clear diligence.
Conversely, a taxpayer that makes no choice
expresses uncertainty or lack of preference and
hence shows simple negligence or plain oversight.
(CIR vs. PERF Realty Corporation, G.R. No.
163345, July 4, 2008)
Quantum of Proof Required to Prove a Claim for
Tax Refund.
Only the preponderance of evidence threshold as
applied in ordinary civil cases is needed to
substantiate a claim for tax refund proper.
(Commissioner of Internal Revenue vs. Mirant
Pagbilao Corporation, G.R. No. 172129,
September 12, 2008)
To determine the validity of taxpayer’s claim as to
unutilized input VAT, an invoice would suffice
provided the requirements under Section 113 and
 134 |TAXATION LAW REVIEWER
237 of the Tax Code are met. Sales invoice are
recognized commercial documents to facilitate
trade or credit transactions. They are proofs that
a business transaction has been concluded, hence,
should not be considered bereft of probative value.
(AT&T Communications Service Philippines, Inc.
vs. Commissioner of Internal Revenue, G.R. No.
182364, August 3, 2010 )
Tax Credit is a claim for issuance of a tax credit
certificate, showing an amount owing from the
government to the taxpayer which the latter is
legally authorized to credit or offset against
national internal taxes payable by him, except
withholding taxes.
TAX REFUND TAX CREDIT
There is actual The reimbursable
reimbursement of amount is applied
the tax. against the sum that
may be due of
collectible from the
taxpayer.
IRREVOCABILITY RULE
A corporation entitled to a tax credit or refund of
the excess estimated quarterly income taxes paid
has two options: (1) to carry over the excess credit;
or (2) to apply for the issuance of tax credit
certificate or to claim cash refund. If the option to
carry over the excess credit is exercised, the same
shall be irrevocable for the taxable period. To
facilitate tax collection, these remedies are in the
alternative and the choice of one precludes the
other. This is known as the irrevocability rule and
is embodied in the last sentence of Section 76 of
the Tax Code.
Under Section 76 of the NIRC, the application of
the option to carry-over the excess creditable tax
is not limited only to the immediately following
taxable year but extends to next succeeding
taxable years. The clear intent in the amendment
under Section 76 is to make the option, once
exercised, irrevocable for the “succeeding taxable
years.”
Thus, once the taxpayer opts to carry-over the
excess income tax against the taxes due for the
succeeding taxable years, such option is
irrevocable for the whole amount of the excess
income tax, thus, prohibiting the taxpayer from
applying for a refund for the same excess income
tax in the next succeeding taxable years.
(Asiaworld Properties Philippine Corporation vs.
Commissioner of Internal Revenue, G.R. No.
171766, July 29, 2010)
The evident intent of the legislature in adding the
last sentence to Section 76 is to keep the taxpayers
from flip-flopping on its options and therefore, get
rid of confusion and complication as regards
taxpayers’ excess tax credits. (Commissioner of
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
Internal Revenue vs. Bank of the Philippine
Islands, G.R. No. 178490, July 7, 2009)
PERIOD TO FILE REFUND OF UNUTILIZED
INPUT VAT
(ADMINISTRATIVEANDJUDICIAL)
RECKONING OF THE TWO-YEAR PERIOD
Atlas Ruling:
For practical reasons, the reckoning of the two-
year prescriptive period for filing a claim for
refund of input VAT on zero-rated sales is from the
date of filing of the return and the payment of tax
due. (Atlas Consolidated Mining and Development
Corporation vs CIR. G.R. Nos. 141104 & 148763,
June 8, 2007)
Mirant Ruling:
The reckoning point of the two-year prescriptive
period commences from the close of the taxable
quarter when the relevant sales were made
pertaining to the input VAT regardless of whether
the said tax was paid or not. Sections 204 (C) and
229 of the 1997 NIRC cannot apply for a claim for
refund of excess input VAT on zero-rated sales
considering that it is not a case of erroneous
payment or illegal collection of taxes. (CIR vs.
Mirant Pagbilao Corp., G.R. No. 172129,
September 12, 2008)
Aichi Ruling:
Following the ruling in Mirant case, reckoning
point of the two-year prescriptive period shall be
from the close of the taxable quarter when the
sales were made. Section 112(A) which states
“within 2 years xxx apply for the issuance of a tax
credit certificate or refund” refers to applications
for refund/credit filed with the CIR and not to
appeals made to the CTA. The 120—30 day period
under Section 112 (D) is crucial in filing an appeal
to the CTA. Section 229 does not apply to
refunds/credits of unutilized input VAT of zero-
rated sales. In computing legal periods, the
Administrative Code of 1987 prevails over the
Civil Code. (Commissioner Internal Revenue vs.
Aichi Forging Company of Asia, Inc., G.R. No.
184823, October 6, 2010)
REMEDIES OF THE GOVERNMENT
FOR NON-PAYMENT OF TAXES
1. Administrative remedies
a. tax lien
b. distraint (actual and constructive)
c. levy and sale of property of a delinquent
taxpayer
d. forfeiture of property
e. suspension of business operations
f. penalties and fines
g. compromise and abatement
2. Judicial Remedies
a. civil action
b. criminal action
 135

A: Yes. It is settled that good faith and honest

NOTES:
One or all of the remedies may be pursued
simultaneously in the discretion of revenue
authorities.
Distraint or levy NOT availed of where the
amount of tax involved is NOT MORE than
P100.
C.
3. Enforcement of Administrative Fine
STATUTORY OFFENSES AND PENALTIES
A. Penalties and fines:
Refer to:
a. surcharges
b. deficiency and delinquency interest
c. compromise penalty
B. Surcharges – not really a penalty as used in
criminal law but a civil administrative
sanction designed primarily to:
a. protect the State revenue, and
b. reimburse the government for the
expenses in investigating and the loss
resulting from the taxpayer’s fraud.
belief that one is not subject to tax on the basis
of previous interpretations of government
agencies tasked to implement that tax law are
sufficient justification to delete the imposition
of surcharges and interest. (Tambunting
Pawnshop, Inc. vs. Commissioner of Internal
Revenue, G.R. No. 179085, January 21, 2010)
Interest:
a. Deficiency interest
20% per annum from the date prescribed
for its payment until the full payment
thereof
b. Delinquency interest
Interest of 20% or the Manila Reference
rate, whichever is higher, required to be
paid in case of failure to pay:
1. the amount of the tax due on any
return required to be filed;
2. amount of the tax due for which return
is required;
3. the deficiency tax or any surcharge or
interest thereon, on the date
appearing in the notice and demand of
the CIR

Penalty of 25% of the amount due for: D. Compromise:

1. failure to file any return and pay the tax Similarities of compromise and compromise
due thereon; penalty:
2. filing a return with the wrong agent of the 1. They both imply mutual agreement.
BIR, unless otherwise authorized by the
CIR 2. A compromise penalty cannot be imposed
3. failure to pay the deficiency tax within the in the absence of a showing that the
time prescribed for its payment in the taxpayer consented thereto.
notice of assessment;
4. failure to pay the full or part of the tax as 3. The CIR has no power to impose and
shown on the return on or before the due collect the compromise penalties in the
date absence of a compromise agreement
validly entered into between the taxpayer
Penalty of 50% of the amount due for: and the CIR.
1. willful neglect to file the return within the
period prescribed by the Code,
2. false or fraudulent return is willfully made COMPROMISE
COMPROMISE
PENALTY
NOTE: In case the taxpayer, without Definition
notice from the Commissioner or his duly An amount of money An amount of money
authorized representative, voluntarily paid by the taxpayer paid to compromise a
files a return, only 25% surcharge shall be to settle his civil tax violation that he
imposed for late filing and late payment of liability for tax has committed, which
the tax in lieu of the 50% surcharge. assessed may be subject of
criminal prosecution
3. person not VAT registered issues an Basis of amount paid
invoice or receipt showing his TIN, Basic tax assessed Gross sales or
followed by the word “VAT” receipts during the
year of the tax due
Q: Taxpayer argues against liability Minimum amount
surcharges and interest – that it was in good The limitation Depends on the
faith in not paying documentary stamp taxes, depends on the legal nature of the tax
having relied on the ruling of the CIR and the grounds used by the violation and the
CTA that pawn tickets are not subject to taxpayer minimum amount is
documentary stamp taxes. Is he correct? generally not less
than P1,000
 136 |TAXATION LAW REVIEWER
ORGANIZATION AND FUNCTION OF
THE BUREAU OF INTERNAL REVENUE
Headed by a Commissioner of Internal Revenue
and four (4) Deputy Commissioners.
Each Deputy Commissioner is the head of the
Operations Group, Legal and Inspection Group,
Resource and Management Group, and
Information Systems Group, respectively.
NOTE: Two more Deputy Commissioners were
appointed in 2003 as head of the Prosecution
Group and the Special Concerns Group. Hence,
there are already six (6) Deputy Commissioners.
 Together with the Commissioner and Deputy
Commissioners are the thirteen (13) Assistant
Commissioners.
 Supporting them are the nineteen (19)
Revenue Directors, one hundred fifteen (115)
Revenue District Officers, two (2) Large
Taxpayers Audit and Investigation Divisions
and two (2) Large Taxpayers District Offices
and thousands of revenue officers conducting
the audit of taxpayers’ books of accounts and
accounting records.
Powers and Duties of the BIR
1. To assess and collect national internal taxes,
fees, and charges;
2. To enforce all forfeitures, penalties and fines
connected therewith;
3. To execute judgment in all cases decided in its
by the CTA and the ordinary courts; and
4. To effect and administer the supervisory and
police powers conferred upon it by the Tax
Code or other special laws (Sec. 2, NIRC).
POWERS OF THE COMMISSIONER OF
INTERNAL REVENURE (CIR)
1. Power to interpret tax laws and decide tax
cases
Exclusive and original jurisdiction of the
Commissioner, subject to review of the
Secretary of Finance (Sec. 4, NIRC).
The authority of the Secretary of Finance
shall be without prejudice to the power of the
CIR to make rulings or opinions in connection
with the implementation of the provisions of
internal revenue laws, including ruling on the
classification of articles of sales and similar
purposes (Commissioner vs. Josefina Leal,
G.R. No. 113459, Nov. 18, 2002).
2. Power to examine books and other accounting
records to obtain information
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
It includes:
 Authority to examine any book, paper,
record or other data relevant to the
inquiry
 Authority to obtain information such as,
but not limited to, costs and volume of
production, receipts or sales and gross
incomes, and financial statements of
taxpayers
 Authority to summon person liable to tax
or required to file a return, or any person
having custody of books of accounts
relating to business of the person liable to
tax
 Authority to take such testimony of the
person concerned, under oath, as may be
relevant or material to such inquiry
 Authority to cause revenue officers and
employees to make a canvass of any
revenue district or region and inquire
concerning all persons therein who may
be liable to pay any internal revenue tax
3. Power to inquire into bank deposits of
taxpayers
Notwithstanding any contrary provisions of
the Bank Secrecy Law and other general or
special laws, the CIR is authorized to inquire
into the bank deposits of:
a. A decedent to determine his gross estate;
and
b. Any taxpayer who has filed an
application for compromise of his tax
liability under Section 204 (A) (2) of the
Tax Code by reason of financial
incapacity to pay his tax liability
4. Power to assess and collect the correct amount
of tax
After the return is filed, the Commissioner or
his duly authorized representative may
authorize the examination of any taxpayer
and the assessment of the correct amount of
tax.
For reasons of public policy based on the
lifeblood theory, the assessment made by the
CIR id prima facie presumed correct.
The burden of proof to show the incorrectness
or inaccuracy of such assessment or its details
lies on the taxpayer, contrary to the usual
presumptions of good faith and innocence.
5. Power to allow withdrawal of any return
statement or declaration, although the same
may be amended
 137

Any return, statement or declaration filed in

any office authorized to receive the same shall
not be withdrawn.

However, the same may be modified, changed,

or amended within 3 years from the date of
such filing, provided no notice for audit or
investigation of such return, statement or
declaration has, in the meantime, been
actually served upon the taxpayer (Sec. 6[A],
NIRC).

Retroactivity of BIR Rulings:

General Rule: Prospective.

Exceptions:
1. Where the taxpayer deliberately misstates or
omits material facts from his return or any
document required of him by the BIR;
2. Where the facts subsequently gathered by the
BIR are materially different from the facts on
which the ruling is based; and
3. Where the taxpayer acted in bad faith.

Q: Does the Commissioner of Internal Revenue

have the power to reclassify registered cigarette
brands and adjust their tax rates?
A: No. Reiterating its August 20, 2008 ruling in
British American Tobacco v. Camacho (G.R. No.
163583), the Court held that the BIR is devoid of
power to review, for purposes of updating tax
classifications, the current net retail prices of
cigarettes that are already registered. The
passage by the BIR of Revenue Regulations No. 9-
2003 which provides for a periodic review of the
current net retail prices of new cigarettes and an
update of their classification, as well as the
subsequent Revenue Regulation No. 22-2003
which implemented the revised tax classification
of certain new brands, unjustifiably emasculate
the operation of Section 145 of the NIRC because

they authorize
Commissioner of Internal
the
LOCAL GOVERNMENT CODE OF 1991
Revenue to update the tax (As amended)
classification of new brads
every two years or earlier subject only to its
issuance of the appropriate Revenue Regulations.
The Court stressed that nowhere in the law is such
authority granted to the BIR. (Secretary of
Finance vs. La Suerte Cigar and Cigarette
Factory, G.R. No. 166498, June 17, 2009)

LEGAL BASIS OF LOCAL GOVERNMENT

UNIT’S (LGU) POWER TO TAX
 138 |TAXATION LAW REVIEWER
1. CONSTITUTIONAL BASIS
(SEC. 5, ARTICLE X, 1987, 1987
CONSTITUTION) – Each local government
unit shall have the power to create its own
sources of revenue and to levy taxes, fees and
charges subject to such guidelines and
limitations as the congress may provide,
consistent with the basic policy of local
autonomy. Such taxes, fees, and charges shall
accrue exclusively to the local governments.
2. REPUBLIC ACT NO. 7160, SEC. 129
(LOCAL GOVERNMENT CODE) – Each local
government unit shall exercise its power to
create its own sources of revenue and to levy
taxes, fees, and charges subject to the
provisions herein, consistent with the basic
policy of local autonomy. Such taxes, fees, and
charges shall accrue exclusively to the local
governments.
NOTE: Under the present constitutional
regime/administration, the constitution grants
local governments the power to tax to the extent
that no antecedent legislation is needed before
they can levy taxes. However, the congress may
issue guidelines and limitations consistent with
the policy of local autonomy.
FUNDAMENTAL PRINCIPLES
(Sec. 130, LGC)
1. Taxation shall be uniform in each local
government unit.
2. Taxes, fees, and charges shall be:
 -be equitable and based as much as
possible on the taxpayer’s ability to pay;
 -be levied and collected for public
purposes;
 -not be unjust, excessive, oppressive or
confiscatory;
 -not to be contrary to law, public policy,
national economic policy, or restraint of
trade.
3. The collection of local taxes, fees, charges, and
other impositions shall in no case be left to
any private person;
4. The revenue collected shall inure solely to the
benefit of, and subject to disposition by, the
LGU levying the tax or other imposition
unless otherwise specifically provided; and
5. Each LGU shall, as far as practicable, evolve
a progressive system of taxation.
NATURE OF TAXING POWERS OF LGUs
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
– Not inherent
– Exercised only if delegated by law or
Constitution; and
– Not absolute; subject to limitations provided for
by law
NOTE: Under the present Constitutional Rule,
“where there is neither a grant nor a prohibition
by a statute, the tax power must be deemed to
exist although Congress may provide statutory
limitations and guidelines. The basic rationale is
to safeguard the viability and self-sufficiency of
local government units by directly granting them
general and broad powers.”
(Manila Electric Co. vs. Province of Laguna, G.R.
No. 131359, May 5, 1999).
A. Grant of Local Taxing Power under the Local
Government Code (Sec. 132, LGC)
Section 132 Local Taxing Authority- The power to
impose a tax, fee, or charge or to generate revenue
under this Code shall be exercised by the
Sanggunian of the LGU concerned through an
appropriate ordinance.
B. Authority to Prescribe Penalties for Tax
Violations (Sec. 516, LGC)
1. The Sanggunian is authorized to
prescribe fines or other penalties for
violations of tax ordinance subject to the
following limitations:
– In no case shall fines be less than
P1,000 nor more than P5,000;
– Nor shall the imprisonment be
less than one (1) month nor more than six
(6) months.
2. Such fine or other penalty shall be
imposed at the discretion of the court.
3. The Sangguniang Baranggay may
prescribe a fine of not less than P100 nor
more than P1,000.
C.Authority to Grant Local Tax Exemptions
(Sec. 192, LGC)
LGUs may, through ordinances duly approved
grant tax exemptions, incentives or reliefs under
such terms and conditions as they may deem
necessary.
Such authority does not apply to regulatory fees
because they are levied under the police power of
the LGUs.
D.Withdrawal of Tax Exemption Privileges
(Sec. 193, LGC)

Tax exemptions granted to, or presently enjoyed
by all persons, whether natural or juridical,
including government-owned or –controlled
corporations, except local water districts,
cooperatives duly registered under R.A. 6938, non-
stock and non-profit hospitals and educational
institutions were withdrawn upon the effectivity
of the LGC.
E.Authority to Adjust Local Tax Rates
(Sec. 191, LGC)
LGUs may adjust rates of tax ordinances
prescribed in the LGC but subject to the following
limitations:
1) Not oftener than once every five (5) years;
and
2) In no case shall such adjustment exceed
10% of the rates fixed under the LGC.
F.Residual Taxing Power (Sec. 186, LGC)
Local government units exercise the power to levy
taxes, fees or charges on any base or subject NOT:
1. Specifically provided by the Local Government
Code
2. Taxed under the provisions of the National
Internal Revenue Code, as amended, and
3. Other applicable laws
Conditions:
1. The taxes, fees, or charges shall not be
unjust, excessive, oppressive,
confiscatory or contrary to declared
national policy; and
2. The ordinance levying such taxes shall
not be enacted without any prior public
hearing conducted for the purpose.
Limitations of the Residual Power
1. Constitutional limitation on taxing power
2. Common limitations prescribed in Sec. 133
of the LGC
3. Fundamental principles governing the
exercise of the taxing power of the LGU’s
prescribed under Sec. 130 of the LGC
4. The ordinance levying such residual taxes
shall not be enacted without any prior
public hearing conducted for the purpose
and
5. The principle of preemption.
G.Authority to Issue Local Tax Ordinances
(Sec. 132, LGC)
This is exercised by the Sanggunian of the LGU
concerned through an appropriate ordinance.
Kinds of Ordinance:
1. Those imposing a fee or tax specifically
authorized by the LGC for the LGUs to
impose.
139
2. Those imposing a fee or tax not specifically
enumerated under the LGC or taxed under
the provisions of the NIRC or other applicable
laws (Sec. 186, LGC).
Requisites of a VALID ORDINANCE:
 Satisfy the requirements of procedural and
substantive due process
 Public hearing is required with quorum,
voting and approval and/or veto requirements
complied with (Secs. 53-55, LGC).
 Publication of ordinance within 10 days from
approval for 3 consecutive days in a
newspaper of general circulation and/or
posting at least 2 conspicuous and publicly
accessible places.
LOCAL TAXING AUTHORITY
Power to Create Revenues Exercised thru LGUs
1. Power to prescribe penalties for tax violations
and limitations thereon;
2. Power to grant local tax amnesty ;
3. Power to adjust local tax rates (Sec. 129,
LGC);
4. Exercise of the residual taxing powers
(Sec. 186, LGC).
Procedure for Approval and Effectivity of Tax
Ordinance
The sangguniang panlalawigan, sangguniang
panlungsod, or sangguniang bayan shall enact an
ordinance;
The said ordinance shall be presented to the
provincial governor, or city or municipal mayor, as
the case may be;
The respective local chief executive shall approve
or veto it:
 If he approves it, he shall affix his
signature on each and every page thereof;
 If he vetoes it, he shall return the same
with his objections to the sanggunian,
which may proceed to reconsider the
same.
The respective sanggunian may override the
veto of the local chief executive by two-thirds
(2/3) vote of all its members, thereby making
the ordinance or resolution effective for all
legal intents and purposes;
The local chief executive shall communicate
the veto to the sanggunian within 15 days in
the case of a province, and 10 days in the case
of a city or a municipality; otherwise, the
ordinance shall be deemed approved as if he
had signed it.
NOTE: Ordinances enacted by the
sangguniang barangay shall, upon approval
by the majority of all its members, be signed
by the punong barangay.
 140 |TAXATION LAW REVIEWER
Within 10 days after approval, certified true
copies of all provincial, city, and municipal tax
ordinances or revenue measures shall be
published in full for three (3) consecutive days
in a newspaper of local circulation.
In the absence of newspapers of local
circulation, the ordinance or measure may be
posted in at least two (2) conspicuous and
publicly accessible places.
NOTE: Respective local treasurers shall be
furnished with the copies of the ordinance or
revenue measures for public dissemination.
PRINCIPLE OF PREEMPTION OR
EXCLUSIONARY PRINCIPLE
Where the national government elects to tax a
particular area, it impliedly withholds from the
local government the delegated power to tax the
same field. This doctrine primarily rests upon the
intention of congress. Conversely, should congress
allow municipal corporations to cover fields of
taxation it already occupies then the doctrine of
pre-emption will not apply (Victoria Milling Co.,
Inc. vs. Municipality of Victorias, et al, G.R. no. l-
21183, 27 September, 1968).
Principle Of Pre-Emption Applies To The
Following:
a. Taxes levied under the NIRC;
b. Taxes, fees, and other charges imposed under
the tariff and customs code; and
c. Taxes, fees, and other charges under special
laws.
SPECIFIC TAXING POWER OF LGUs
TAXING POWERS OF PROVINCES
(Secs. 134-141, LGC)
A. Tax on Transfer of Real Property Ownership
(Sec. 135, LGC)
Transaction Taxed:
Tax on sale, donation, barter or any other mode of
transferring ownership or title to real property
Except: The sale, transfer, or other disposition of
real property pursuant to the Comprehensive
Agrarian Reform Law of 1988 shall be exempt
from this tax.
Tax Rate:
Not more than fifty percent (50%) of one percent
(1%) of the total consideration involved in the
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
acquisition of property of the FMV in the case the
monetary consideration involved in the transfer is
not substantial, whichever is higher.
Time of Payment: within sixty (60) days from the
date of the execution of the deed or death of
decedent.
Person Liable to Pay:
1. Seller;
2. Donor;
3. Transferor; or
4. Executor or administrator
B. Tax on Business of Printing and Publication
(Sec. 136, LGC)
Transaction Taxed:
Tax on the business of persons engaged in the
printing and/or publication of books, cards,
posters, leaflets, handbills, certificates, receipts,
pamphlets, and other similar nature
Except: printing and/or publishing of books or
other reading materials prescribed by DepED,
CHED or TESDA
Tax Rate:
1. not more than fifty percent (50%) of one
percent (1%) of the gross annual receipts
for the preceding calendar year;
2. In case of newly started business:
 Tax shall not exceed one-
twentieth (1/20) of one percent
(1%) of the capital investment
 In the succeeding calendar year,
regardless when the business
started to operate, the
tax shall be based on the gross
receipts for the preceding
calendar year, or any fraction
thereof
C. Franchise Tax (Sec. 137, LGC)
1. Tax on businesses enjoying a franchise, at a
rate not exceeding 50% of 1% of the gross
annual receipts for the preceding calendar
year based on incoming receipt, or realized,
within its territorial jurisdiction.
2. In the case of newly started business, the
tax shall not exceed 1/20 of 1% of the capital
investment. In the succeeding calendar year,
regardless of when the business started to
operate, the tax shall be based on the gross
receipts for the preceding calendar year, or
any fraction thereof.
D. Tax on Sand, Gravel and Other Quarry
Resources (Sec. 138, LGC)

1. Levy and collect not more than 10% of fair
market value in the locality per cubic meter of
ordinary stones, sad, gravel, earth, and other
quarry resources extracted from public lands
or from the beds of seas, lakes, rivers,
streams, creeks, and other public waters
within its territorial jurisdiction.
2. The permit to extract sand, gravel and other
quarry resources shall be issued exclusively
by the Provincial Governor, pursuant to
the ordinance of the Sangguniang
Panlalawigan.
3. The proceeds of the tax shall be distributed as
follows:
a. Province – 30%;
b. Component city or municipality
where the sand, gravel and other
quarry resources are extracted –
30%;
c. Barangay where the sand, gravel,
and other quarry resources are
extracted – 40%.
E. Professional Tax (Sec. 139, LGC)
1. Annual professional tax on each person
engaged in the exercise or practice of his
profession requiring government examination
at such amount and reasonable classification
as the Sangguniang Panlalawigan may
determine but in no case shall exceed three
hundred pesos (P300).
2. In case the person practices his profession in
several places, he shall pay professional tax to
the province where he practices his profession
or where he maintains his principal office.
However, he shall be entitled to practice his
profession in any part of the Philippines
without being subjected to other national or
local tax, license, or fee for the practice of such
profession.
3. In Section 139, the tax is imposed by
provinces, while in Section 147, it is imposed
by cities and municipalities:
a. In the former, those persons subject to
tax are those who passed a government
examination, while in the latter, the
persons tax are those who are not
required to pass a government
examination;
b. In the former, it provides for a maximum
amount to be imposed which is P300.00,
while the latter does not set a maximum
amount.
4. It shall be payable annually, on or before
the 31st day of January. Any person first
beginning to practice a profession after the
month of January must, however, pay the
full tax before engaging therein.
141
NOTE: A line of profession does not become
exempt, even if conducted with some other
profession for which the tax has been paid.
5. Professionals exclusively employed in the
government shall be exempt from the
payment of this tax.
F. Amusement Tax (Sec. 140, LGC)
1. Levy an amusement tax to be collected from
the proprietors, lessees, or operators of
theatres, cinemas, concert halls, circuses,
boxing stadia, and other places of amusement
at a rate of not more than 30% of the gross
receipts for admission fees.
NOTE: In case of theatres or cinemas, the tax
shall first be deducted and withheld by their
proprietors, lessees, or operators and paid to
the provincial treasurer before the gross
receipts are divided between said proprietors,
lessees, or operators and the distributors of
the cinematographic films.
2. The holding of operas, concerts, dramas,
recitals, painting, and art exhibitions, flower
shows, musical programs, literary and
oratorical presentations, except pop, rock, or
similar concerts shall be exempt from the
payment of the tax.
The proceeds from the amusement tax shall
be shared equally by the province and the
municipality where such amusement places
are located.
Annual Fixed Tax for Every Delivery Truck or Van
of Manufacturers or Producers, Wholesalers of,
Dealers, or Retailers in certain products
1. Annual fixed tax in the delivery or
distribution of distilled spirits, fermented
liquors, softdrinks, cigars and cigarettes, and
other products as may be determined by the
Sangguniang Panlalawigan, to sales outlets,
or consumers, whether directly or indirectly,
within the province in an amount not
exceeding P500.00.
NOTE: The tax is imposed if there is a vehicle
used in the delivery. If the deliveries are
made by a person only, the person delivers the
goods mentioned, this tax is not applicable
but the tax to be applied is the tax under
Section 1439 (g) – the tax on peddlers.
TAXING POWERS OF CITIES
(Sec. 151, LGC)
Cities are authorized specifically to impose taxes,
fees and charges that provinces and
municipalities may levy, at rates that may be
above the maximum established for provinces and
municipalities but not exceeding 50% of such
 142 |TAXATION LAW REVIEWER
maximum rates except the rates of professional
and amusement taxes.
Cities may levy a community tax.
TAXING POWERS OF MUNICIPALITIES
(Sec. 143, LGC)
Municipalities may levy taxes, fees, and charges
not otherwise levied by provinces. They may also
levy a community tax.
Tax on Various Types of Business
The municipality may impose taxes on the
following businesses:
1. On manufacturers, assemblers, repackers,
processors, brewers, distillers, rectifiers, and
compounders of liquors, distilled spirits, and
wines or manufacturers of any article of
commerce of whatever kind or nature;
2. On wholesalers, distributors, or dealers in
any article of commerce of whatever kind or
nature;
3. On exporters, and on manufacturers, millers,
producers, wholesalers, distributors, dealers
or retailers of essential commodities
enumerated hereunder at a rate not
exceeding ½ of the rates prescribed under
paragraphs (a), (b) and (d) of Section 142 of
the Local Government Code:
 Rice and corn;
 Wheat or cassava flour, meat, dairy
products, locally manufactured,
processed or preserved food, sugar, salt
and other agricultural, marine, and fresh
water products, whether in their original
state or not;
 Cooking oil and cooking gas;
 Laundry soap, detergents, and medicine;
 Agricultural implements, equipment and
post-harvest facilities, fertilizers,
pesticides, insecticides, herbicides and
other farm inputs;
 Poultry feeds and other animal feeds;
 School supplies; and
 Cement
4. On retailers, with gross sales or receipts for
the preceding calendar year of:
5. On contractors and other independent
contractors;
6. On banks and other financial institutions, at
a rate not exceeding 50% of 1% on the gross
receipts of the preceding calendar year;
7. On peddlers engaged in the sale of any
merchandise or article of commerce, at a rate
not exceeding P50.00 per peddler annually;
NOTE: On any business, provided, however,
that in the case of any business subject to the
excise, value-added or percentage tax under
the NIRC, the rate of the tax shall not exceed
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
2% of gross sales or receipts for the preceding
calendar year.
Ceiling on Business Tax in Municipalities within
Metropolitan Manila Area
The municipalities within the Metropolitan
Manila Area may levy taxes at rates which shall
not exceed by 50% the maximum rates prescribed
by municipalities.
Tax on Retirement of Business
1. A business shall, upon termination
thereof, submit a sworn statement of its
gross sales or receipts for the current
year.
2. It the tax paid during the year be less
than the tax due on said gross sales or
receipts of the current year, the
difference shall be paid before the
business is considered officially
retired.
Rules on Payment of Business Tax
1. The tax imposed by the municipalities is
payable by every separate and distinct
establishment or place where such
business is conducted.
2. In case a person conducts two or more
businesses subject to the same tax rate,
the tax shall be computed on the
combined total gross sales or receipts of
the two or more businesses.
3. In case the tax rates applicable to the
businesses are different, the gross sales
or receipts of each business shall be
separately reported.
Per Annum Rate of Tax
(1) P400,000.00 or less 2%
(2) more than P400,000.00 1%
Fees and Charges for Regulation and Licensing
1.Fees for Sealing and Licensing of Weights and
Measures
a. Levy fees at such reasonable rates as shall be
prescribed by the sangguniang bayan.
b. The sangguniang bayan shall prescribe the
necessary regulations for the use of such weights
and measures, subject to the guidelines as shall be
prescribed by the Department of Science and
Technology.
The sangguniang bayan, pursuant to an
appropriate ordinance, may:
a. Penalize fraudulent practices and unlawful
possession or use of instruments or weights

and measures and prescribe the criminal
penalty therefor;
b. Authorize the municipal treasurer to settle
an offense not involving the commission of
fraud before a case therefor is filed in court,
upon payment of a compromise penalty of
not less than P200.00.
2.Fishery Rentals, Fees and Charges
a. Municipalities shall have exclusive authority to
grant fishery privileges in the municipal waters
and impose rentals, fees or charges therefor;
b. The sangguniang bayan may:
1. Grant fishery privileges to erect fish
corals, oyster, mussels or other aquatic
beds or bangus fry areas, within a
definite zone of the municipal waters;
NOTE: Duly registered organizations
and cooperatives of marginal fishermen shall
have the preferential right to fishery
privileges. In their absence or failure to
exercise their preferential right, other parties
may participate in the public bidding.
2. Grant the privilege to gather, take or
catch bangus fry, prawn fry or kawag-
kawag or fry of other species and fish
from the municipal waters by nets, traps
or other fishing gears to marginal
fishermen free of any rental, fee, charge
or any other imposition whatsoever;
c. Issue licenses for the operation of fishing
vessels of three (3) tons or less for which
purpose the sangguniang bayan shall
promulgate rules and regulations regarding
the issuances of such licenses to qualified
applicants under existing laws.
Situs of Tax Collected (Sec. 150, LGC)
Branch or sales office – a fixed placed in the
locality which conducts the operation of the
business as an extension of the principal office.
Principal office – the head or the main office of the
business; the city or the municipality specifically
mentioned in the Articles of Incorporation or
official registration papers as being the official
address of said principal office shall be considered
the situs thereof.
For businesses, the tax shall be paid to the
municipality where the branch is located. In the
absence thereof, the taxes shall pertain to the city
or municipality where the principal office is
located.
For factories, project offices, plants and
plantations in the conduct of its business, 30% of
the sales shall be taxed by the city or municipality
where the principal office is located; while the
remaining 70% shall be taxed by the city or
143
municipality where the factory, project office,
plant and plantation are located.
If the plantation is located in a place different
from where the factory is located, the 70% shall be
further divided, thus:
60% - taxable by the city or
municipality where the factory is
located;
40% - taxable by the city or
municipality where the plantation is
located.
If the factory, project office, plant and plantation
is located in different localities, the 70% shall be
divided pro rata among the different localities
where such establishments are located. The
division shall be based on the respective volumes
of production during the taxable period.
Situs According to Jurisprudence:
With respect to excise tax, the tax is upon the
performance of an act, enjoyment of a privilege or
the engaging in an occupation. The power to levy
such tax is not dependent on the domicile of the
taxpayer, but on the place in which act is
performed or the occupation is engaged in; not
upon the location of the office, but the place where
the sale is perfected. (Allied Thread Co., Inc. vs.
City Mayor of Manila, L-40296)
With respect to sale, it is the place of the
consummation of the sale, associated with the
delivery of the things which are the subject matter
of the contract that determines the situs of the
contract for purposes of taxation, and not merely
the place of the perfection of the contract. (Shell
Co., vs. Municipality of Sipocot, Camarines Sur
105 Phil. 1263)
TAXING POWERS OF BARANGAYS
The barangay may levy taxes, fees, and charges,
which shall exclusively pertain to them:
Taxes – on stores or retailers with fixed
business establishments with gross sales or
receipts of P50,000 or less; in case of cities,
P30,000 or less; in case of municipalities, at a
rate not exceeding 1% of the gross receipts.
Service Fees or Charges – collect reasonable
fees or charges for services rendered in
connection with the regulation or the use of
barangay-owned properties or service
facilities such as palay, copra, or tobacco
dryers.
 144 |TAXATION LAW REVIEWER
Barangay Clearance – it is a condition
precedent before a business license or permit
may be issued by a city or municipality. It
must be issued by the barangay where the
business is located. It is for this purpose that
the sangguniang barangay is authorized by
the LGC to impose reasonable fees.
The application for clearance shall be acted
upon seven (7) working days from its filing. In
case the 7-day period lapsed without the
barangay acting upon the same, the city or
municipality may issue such clearance.
Other Fees and Charges – it may levy
reasonable fees and charges on:
 commercial breeding of fighting cocks,
cockfights and cockpits;
 places of recreation which charge
admission fees; and
 billboards, signboards, neon signs, and
outdoor advertisements.
COMMON REVENUE RAISING POWERS
The following fees and charges may be imposed by
all LGUs:
A. Service Fees and Charges – on services
rendered provided such fees or charges are
reasonable.
B. Public Utility Charges – for the operation
of public utilities which must be owned,
operated and maintained by the LGU
concerned within their jurisdiction.
C. Toll Fees or Charges – for the use of any
public road, pier, wharf, waterway, bridge,
ferry or telecommunication system funded
and constructed by the LGU concerned. By
way of exception, the toll fees imposed under
this section shall not apply:
 Officers and enlisted men of the AFP;
 Members of the PNP on mission;
 Post-office personnel delivering mail;
 Physically handicapped and disabled
citizens who are 65 years or older; and
 When public safety requires, the said
facility shall be free and open for public
use.
COMMUNITY TAX
Who are liable to pay?
Individuals Liable to Community Tax
Every inhabitant of the Philippines (regardless of
the citizenship of the individual) who is:
 eighteen (18) years of age or over;
 who has been regularly employed on
a wage or salary basis for at least
thirty (30) consecutive working days
during any calendar year; or
 engaged in business or occupation; or
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
 owns real property with aggregate
assessed value of P1,000.00 or more;
or
 is required by law to file an income
tax return.
Tax Rate: P5.00 plus an annual community
tax of P1.00 for every P1,000.00 of income
regardless of whether from business, exercise
of profession of from property which in no case
shall exceed P5,000.00.
Place of Payment: place of residence of the
individual.
Juridical Persons Liable to Community Tax
Every corporation no matter how created or
organized, whether domestic or resident foreign,
engaged in or doing business in the Philippines.
It must be duly registered with the Securities and
Exchange Commission.
Tax Rate: P500.00 plus an annual community
tax, which, in no case, shall exceed P10,000.00
in accordance with the following schedule:
a) For every P5,000.00 worth of
real property in the Philippines owned by
it during the preceding year based on the
valuation used for the payment of the real
property tax under existing laws – P2.00.
b) For every P5,000.00 of gross
receipts or earnings derived by it from its
business in the Philippines during the
preceding year – P2.00.
Place of Payment: where the principal office
of the juridical entity is located.
Time of Payment – The community tax shall
accrue on the 1st day of January of each year which
shall not be paid not later than the last day of
February of each year.
Penalties for Delinquency
If the tax is not paid within the time prescribed,
there shall be added to the unpaid amount an
interest of 24% per annum from the date until it is
paid.
Who are exempted from paying tax?
1. Diplomatic and consular
representatives; and
2. Transient visitors when their stay in the
Philippines does not exceed three (3)
months.
COMMON LIMITATIONS ON
LOCAL TAXING POWERS
Unless otherwise provided, the exercise of the
taxing powers of provinces, cities, municipalities,

and barangays shall not extend to the levy of the
following:
1. Income tax, except when levied on banks
and other financial institutions;
2. Documentary stamp tax;
3. Taxes on estates, inheritance, gifts,
legacies and other acquisitions mortis causa,
except as otherwise provided in the LGC;
4. Customs duties, registration fees of
vessel and wharfage on wharves, tonnage
dues, and all other kinds of customs fees,
charges and dues except wharfage on wharves
constructed and maintained by the local
government unit concerned;
5. Taxes, fees and charges and other
impositions upon goods carried into or out of,
or passing through, the territorial jurisdiction
of local government units in the guise of
charges for wharfage, tolls for bridges or
otherwise, or other taxes, fees or charges in
any form whatsoever upon such goods or
merchandise;
6. Taxes, fees or charges on agricultural and
aquatic products when sold by marginal
farmers or fishermen;
7. Taxes on business enterprises certified to
by the Board of Investments as pioneer or
non-pioneer for a period of six (6) and four (4)
years, respectively from the date of
registration;
8. Excise taxes on articles enumerated
under the National Internal Revenue code, as
amended, and taxes, fees or charges on
petroleum products;
NOTE: A local government unit may impose
a tax on a petroleum business. A tax on
business is distinct from a tax on the article
itself;
9. Percentage or value-added tax (VAT) on
sales, barters or exchanges or similar
transactions on goods or services except as
otherwise provided in the LGC;
10. Taxes on gross receipts of transportation
contractors and persons engaged in the
transportation of passengers or freight by hire
and common carriers by air, land or water,
except as provided in the LGC;
11. Taxes on premiums paid by way of
reinsurance or retrocession;
12. Taxes, fees or charges for the registration
of motor vehicles and or the issuance of all
145
kinds of licenses or permits for the driving
thereof, except tricycles;
13. Taxes, fees or other charges on Philippine
products actually exported, except as
otherwise provided herein;
14. Taxes, fees or charges on Countryside
and Barangay Business Enterprises and
cooperatives duly registered under R.A. No.
6810 and R.A. No. 6938, otherwise known as
the “Cooperatives Code of the Philippines”
respectively; and
15. Taxes, fees or charges of any kind on the
National Government, its agencies and
instrumentalities, and local government
units.
COLLECTION OF LOCAL TAXES
Tax Period and Manner of Payment
The tax period shall be the calendar year. Such
taxes, fees and charges may be paid in quarterly
instalments.
Accrual of Tax
 They shall accrue on the 1st day of
January of each year.
 New taxes, fees or charges, or changes in
the rates therof, shall accrue on the 1st day of
the quarter next following the effectivity of
the ordinance imposing such new levies or
rates.
Time of Payment
-Within the first 20 days of January or of each
subsequent quarter, as the case may be.
-The period is extendible but not exceeding six
(6) months.
Penalties on Unpaid Taxes, Fees, or Charges
The imposable surcharge shall not exceed 25% of
the amount of taxes, fees or charges not paid on
time and an interest at the rate not exceeding 2%
per month of the unpaid taxes, fees or charges
including surcharges, until such amount is fully
paid but in no case shall the total interest on the
unpaid amount or portion thereof exceed 36
months.
Authority of Treasurer in Collection and
Inspection of Books
 All local taxes, fees or charges shall be
collected by the provincial, city, municipal, or
barangay treasurer, or their duly authorized
deputies.
 The provincial, city or municipal
treasurer may designate the barangay
treasurer as his deputy to collect local taxes,
fees or charges.
 146 |TAXATION LAW REVIEWER
 The provincial, city, municipal or
barangay treasurer may, by himself or
through any of his deputies duly authorized
in writing , examine the books, accounts, and
other pertinent records of any person,
partnership, corporation, or association
subject to local taxes, fees and charges in
order to ascertain, assess, and collect the
correct amount of the tax, fee, or charge.
 Inspection shall be made during regular
business hours, only once for every tax period,
and certified to by the examining officer.
 In case of examination by duly authorized
deputies of the local treasurer, the written
authority of the deputy concerned shall
specifically state:
(1) Name
(2) Address
(3) Business of the taxpayer
(4) Date and place of examination
(5) Procedure to be followed in
conducting the examination
REMEDIES OF THE TAXPAYER
Prescriptive Periods for the Assessment and
Collection of Local Taxes
Prescriptive Period for Assessment
 Local taxes, fees, or charges shall be
assessed within 5 years from the date they
become due.
 In case of fraud or intent to evade the
payment of taxes, fees, or charges, the same
may be assessed within 10 years from the
discovery of the fraud or intent to evade the
payment.
Prescriptive Period for Collection
Local taxes, fees, or charges may be collected
within 5 years from the date of assessment by
administrative or judicial action. No such action
shall be instituted after the expiration of said
period.
Protest of Assessment (Administrative)
Before Assessment
-Appeal
It is any question on the constitutionality or
legality of tax ordinances or revenue measures
may be raised on appeal;
a. within 30 days from the
effectivity thereof to the
Secretary of Justice;
b. Secretary of Justice shall render
decision within 60 days from the
date of receipt of the appeal;
c. Taxpayer may file appropriate
action within 30 days after
receipt of the decision or the
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
lapse of the 60-day period
(Secretary’s inaction upon the
appeal);
NOTE: The appeal of the taxpayer
shall not have the effect of
suspending the effectivity of the
ordinance and the accrual and
payment of the tax, fee or charge
levied therein.
-Declaratory relief whenever applicable
After Assessment
Protest of the Assessment
Protest is filed (Payment under protest is NOT
necessary)
File a written protest with the local treasurer
within 60 days from the receipt of the notice of
assessment;
Decision: If the local treasurer finds the
assessment
(a) meritorious – issue a notice to
CANCEL wholly or partly the
assessment;
(b) wholly or partly correct – DENY the
protest wholly or partly with notice to
taxpayer.
Appeal: within 30 days from receipt of the denial
of the protest or from the lapse of the 60-day
period, otherwise the assessment becomes
conclusive and unappealable.
No protest is filed -Assessment becomes final and
executory.
Action for Refund or Tax Credit
No case or proceeding shall be maintained in any
court for refund or tax credit unless the following
is satisfied:
a. File a written claim for refund or credit for
any tax, fee, or charge erroneously or
illegally collected;
b. Within 2 years from the date of payment or
from the date the taxpayer is entitled to a
refund or credit.
Right of Redemption – within 1 year from the date
of sale or from the date of forfeiture.
JUDICIAL
1. COURT ACTION
a) Within 30 days after receipt of
the decision or the lapse of the 60-day

period without the secretary of justice
acting upon the appeal;
b) Within 30 days from the receipt
of denial of the protest or from lapse of
the 60-day period within which to appeal,
otherwise, the assessment becomes
conclusive and unappealable;
c) Local treasurer’s inaction in
refund cases and after the lapse of the 2-
year period;
d) If the remedies available do not
provide plain, speedy and adequate
remedy as an exception to the rule of
exhaustion of administrative remedies.
2. DECLARATORY RELIEF
3. INJUNCTION
CIVIL REMEDIES BY THE LGU TO
COLLECT REVENUES
Local Government’s Lien – local taxes, fees,
charges and other revenues constitute a lien,
superior to all liens, charges or encumbrances in
favor of any person, enforceable by appropriate
administrative or judicial action.
The lien may only be extinguished upon full
payment of the delinquent local taxes, fees and
charges including related surcharges and interest.
Civil Remedies
Administrative action
1. Distraint of Personal Property
2. Levy of Real Property
Judicial Action
1. Court Action
2. Declaratory relief
3. Injunction
PROCEDURE FOR ADMISTRATION ACTION
Distraint of Personal Property – it shall proceed
as follows:
1. Seizure
a. Taxpayer failed to pay tax within the
time required.
b. Issuance of Certificate of Delinquency
which shall serve as a sufficient warrant.
c. Local treasurer or his deputy may, upon
written notice, seize or confiscate any
personal property in sufficient quantity
to satisfy the liability.
2. Accounting of distrained goods
3. Publication
a. Posting of the notice of sale in not less
than three (3) public and conspicuous
places in the LGU;
147
b. It may be posted in the office of the chief
executive of the LGU concerned.
4. Release of distrained property upon
payment prior to sale – if at any time
prior to the consummation of the sale, the
taxpayer shall pay all the charges.
5. Auction Sale
a. Should the property distrained be
not disposed of within 120 days from
the date of distraint, the same shall
be considered as sold to the LGU
concerned.
6. Disposition of proceeds
a. The proceeds of the sale shall be applied
to satisfy the tax including all charges
and the expenses of the distraint and
sale.
b. Any excess shall be returned to the owner
of the property sold.
c. If proceeds of the sale are insufficient to
satisfy the claim, other property may be
distrained until fully paid.
Levy on Real Property – It shall proceed as
follows:
1. Preparation of the Certificate
The certificate shall operate with force of a
legal execution throughout the Philippines.
2. Written notice of the levy to the assessor,
Registrar of Deeds and the taxpayer.
3. Levy of the real property
Real property may be levied on before,
simultaneously, or after the distraint of
personal property if the latter is insufficient
to satisfy the tax delinquency.
4. Advertisement
a. The auction sale shall be advertised for a
period of 30 days after the levy;
b. Posting of notice (a) at the main entrance
of the municipal building or city hall, and
(b) in a public and conspicuous place in
the barangay where the real property is
located.
c. Publication of notice once a week for
three (3) consecutive weeks in a
newspaper of general circulation where
the property is located.
5. Release of levied property upon payment
prior to sale – at any time before the date
of sale, the taxpayer may stay the
proceedings by paying all the proper
charges.
6. Auction Sale
a. It shall be held either (a) at the main
entrance of the provincial, city or
municipal building, or (b) on the property
 148 |TAXATION LAW REVIEWER
sold, or (c) at any other place as
determined by the local treasurer;
b. Within 30 days after the sale, the local
treasurer shall make a report of the sale
to the sanggunian concerned;
c. Delivery of the certificate of sale to the
purchaser.
7. Disposition of the proceeds of the sale
a. The proceeds of the sale shall be
applied to satisfy the tax and charges
including all expenses of the sale.
b. Any excess shall be turned over to the
owner of the property.
8. Redemption
a. Within one (1) year from the date of
the sale;
b. Upon payment of the total amount of
taxes, fees, or charges and other
related charges and expenses.
9. Execution of the final deed to the
purchaser – If the taxpayer fails to redeem the
property or after the lapse of 1 year without
redemption.
Note: In case there is no bidder for the real
property advertised for sale, or if the highest
bid is for an amount insufficient to pay the
taxes, fees, or charges and other related
charges and expenses, the local treasurer
shall purchase the property in behalf of the
LGU.
Further Distraint or Levy – The remedies of
distraint and levy may be repeated if necessary
until the full amount due, including all expenses,
is collected.
Properties Exempt from Distraint and Levy
a. Tools and the implements necessarily
used by the delinquent taxpayer in his
trade or employment;
b. One (1) horse, cow, carabao, or other
beast of burden, such as the delinquent
taxpayer may select, and necessarily
used by him in his ordinary occupation;
c. His necessary clothing, and that of all his
family;
d. Household furniture and utensils
necessary for housekeeping and used for
that purpose by the delinquent
taxpayer, such as he may select, of a
value not exceeding P10,000.00;
e. Provisions, including crops, actually
provided for individual or family use
sufficient for 4 months;
f. The professional libraries of doctors,
engineers, lawyers and judges;
g. One fishing boat and net, not exceeding
the total value of P10,000.00, by the
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lawful use of which a fisherman earns
his livelihood; and
h. Any material or article forming part of a
house or improvement of any real
property.
Penalty for Failure to Issue and Execute Warrant
– without prejudice to criminal prosecution under
RPC, the local treasurer shall be automatically
dismissed from the service after due notice and
hearing.
PROCEDURE FOR JUDICIAL ACTION
The local government unit concerned may enforce
the collection of delinquent taxes, fees, charges or
other revenues by civil action.
The civil action shall be filed by the local treasurer
within a period of five (5) years.
City of Pasig vs. Republic of the Philippines, (G.R.
No. 185023, August 24, 2011)
Properties owned by the Republic of the
Philippines are exempt from real property tax,
except when their beneficial use has been granted,
for consideration or otherwise, to a taxable person.
The properties are also exempt from execution or
foreclosure sale unless these are considered
properties of public dominion.
Facts:
Following the ouster of President
Ferdinand Marcos in 1986, Jose Campos, Jr.
voluntarily surrendered to the Republic of the
Philippines properties, assets and corporations
which he had held in trust for the deposed
president. These included Mid-Pasig Land
Development Corporation (MLDC) which was the
registered owner of two parcels of land located in
Pasig City.
In 2005, the Pasig City Assessor’s Office assessed
MLDC delinquency real property taxes (RPT) on
the properties for the period 1987 to 2005, despite
claims that the properties are exempt from RPT
by virtue of the States’ ownership of the parcels of
land. While MLDC paid a portion of the tax
assessed under protest, it received two warrants
of levy on the properties.
The Republic filed a case with the Regional Trial
Court (RTC) to question Pasig City’s levy. Pending
disposition of the case, Pasig City sold the
properties at public auction.
Issues:
1. Are the properties exempt from RPT?
2. Can the properties be sold at public auction?
Ruling:
1. No. Section 234(a) of RA No. 7160 (the Local
Government Code) states that properties owned
 149

by the Republic are exempt from RPT “except

when the beneficial use has been granted, for
consideration or otherwise, to a taxable person.”
Thus, the portions of the properties not leased to
taxable entities are exempt from RPT while those
leased to taxable entities are subject to RPT. The
law imposes the liability to pay RPT on the
Republic.

2. Yes. Properties classified as part of the public

dominion under Article 420 of the Civil Code are
beyond the commerce of man and, consequently,
exempt from sale at public auction. However, the
subject properties are not properties of public
dominion. The parcels of land are neither
“intended for public use, such as roads, canals,
rivers, torrents, ports and bridges constructed by
the State, banks, shores, roadsteads,” nor are
these “intended for some public service or for the
development of the national wealth.”

Although portions of the properties

leased to taxable entities can be sold at public
auction to satisfy the tax delinquency, Pasig City
must first issue to the Republic new RPT
assessments covering the portions of the
properties leased to taxable entities and only for
the period of such leases. Interest and penalties on
such new RPT assessment shall accrue only after
receipt of such new assessment by the Republic. If
the Republic fails to pay the RPT on such portions,
only then may such portions be sold at public
auction to satisfy the tax delinquency.

TARIFF AND CUSTOMS C

(As amended)

TARIFF AND DUTIES

Tariff – custom duties, toll or tribute payable upon

merchandise to the government. It is a schedule of
import and export rates paid to a government.

Customs – are the duties, toll, tribute or tariff

payable upon merchandise exported or imported.

Custom Duties – those which are assessed at the

prescribed tariff rates which are likely imposed for
both revenue raising and for regulatory purposes.
 150 |TAXATION LAW REVIEWER
It is the name given to taxes on the importation
and exportation of commodities, the tariff or tax
assessed upon merchandise imported from, or
exported to, a foreign country. [Garcia vs.
Executive Sec., G.R. No. 101273, July 3, 1992]
NOTE: Customs duties and tariffs are
synonymous with one another. They both refer to
the taxes imposed on imported or exported wares,
articles, or merchandise.
Other Types of Fees Charged by the Bureau of
Customs
 Arrastre charge
 Wharfage due – counterpart of license,
charged not for the use of any wharf but for
a special fund known as the Port Works
Fund.
 Berthing fee
 Harbor fee
 Tonnage due
GENERAL RULE
All importations and exportations of goods are
subject to custom duties. (Sec. 105, TCC)
Exceptions:
1. Exemption under the TCC
2. Exemptions granted to government agencies
or GOCCs with existing contracts,
commitments, agreements, or obligations
with foreign countries.
3. International organizations pursuant to
agreement and special law
4. Exemption granted by the President of the
Philippines upon recommendation of the
NEDA.
Government Importations
Importations by the government are also taxable.
All importations by the government for its own use
or that of its own subordinates branches or
instrumentalities or corporations, agencies or
instrumentalities owned or controlled by the
government shall be subject to the duties, taxes ,
fees and charges provided in the Tariff and
Customs Code.(Section 1205, Tariff and Customs
Code)
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
MEANING AND SCOPE OF THE TARIFF AND
CUSTOMS LAWS
Include not only the provisions of the Tariff and
Customs Code (TCC) and regulations pursuant
thereto, but all other laws and regulations that
are subject to the Bureau of Customs (BOC) or
otherwise within its jurisdiction.
As to its scope, therefore, tariff and customs laws
extend not only to the provisions of the TCC but to
all other laws as well, the enforcement of which is
entrusted to the BOC.
THE BUREAU OF CUSTOMS
FUNCTIONS OF THE BUREAU OF CUSTOMS
1. Assessment and collection of revenues from
imported articles and all other impositions
under the tariff and customs laws;
2. Control smuggling and related frauds;
3. Supervision and control over the entrance and
clearance of vessels and aircraft engaged in
foreign commerce;
4. Enforcement of TCC and related laws;
5. Supervision and control over the handling of
foreign mails arriving in the Philippines;
6. Supervise and control all import and export
cargoes for the protection of government
revenue;
7. Exclusive original jurisdiction over seizure
and forfeiture cases under the tariff and
customs laws.
JURISDICTION OF COLLECTOR OF
CUSTOMS OVER IMPORTATION OF
ARTICLES
1. Cause all articles for importation to be
entered in the customhouse,
2. Cause all such articles to be appraised and
classified,
3. Assess and collect the duties, taxes and other
charges thereon, and
4. Hold possession of all imported articles until
the duties, taxes and other charges are paid
thereon. (Sec. 1206, TCC)
TERRITORIAL JURISDICTION OF THE BOC
1. All seas within the jurisdiction of the
Philippines
2. All coasts, ports, airports, harbors, bays,
rivers and inland waters whether navigable
or not from the sea. (1st par, Sec. 603, TCC)
WHEN TARIFF AND CUSTOMS APPLIED

Only after importation has begun but before
importation is terminated.
Importation begins:
1. when the conveying vessel or aircraft
2. enters the jurisdiction of the Phil.
3. with intention to unload therein
Importation is deemed terminated:
1. upon payment of the duties, taxes and other
charges due upon the articles and
2. legal permit for withdrawal shall have been
granted.
3. In the case of articles that are free of duties,
taxes and other charges, until they have
legally left the jurisdiction of the customs
(Sec. 1202, TCC)
INTENTION TO UNLOAD
Even if not yet unloaded, and there is
unmanifested cargo, forfeiture may take place
because importation has already begun.
PURPOSE FOR IMPOSITION
1. Revenue tariffs – those whose rates are
relatively low so that goods may be readily
imported and duties may be easily collected;
2. Protective tariffs – those whose rates are
relatively high to keep certain imports out of
the domestic market or to raise domestic price
on certain imports so that they may be
manufactured profitably and domestically;
3. Bargaining tariffs – those whose schedules
include rates designed primarily for
bargaining purposes or which contain some
general provision for the imposition of higher
duties upon products of countries whose tariff
policies are considered unsatisfactory or
unfair.
IMPOSITION OF DUTIES
A. Persons liable
Deemed Owner of Imported Articles:
1. consignee holder of bill of lading
2. if consigned to order, the consignor
3. underwriters of abandoned articles and
4. salvors of articles saved at a wreck
 the liability of importer for the duties, taxes,
fees and other charges constitute a personal
debt due to the government which may be
discharged only upon full payment. It also
constitutes a lien upon the articles imported
while articles are in custody or subject to
control of government
151
 all importations by the government, its
branches, instrumentalities, GOCCs,
agencies or instrumentalities owned or
controlled by government are subject to
similar duties, taxes and fees except for
those provided in Sec. 105 (conditionally free
imports)
B. Declaration
Imported articles must be entered in customhouse
at the port of entry within 30 days from date of
discharge by:
1. importer, being holder of B of L
2. customs broker
3. agent
IMPORT ENTRIES:
1. Informal entry
- articles of commercial nature intended for
sale, barter or hire the DV is P2,000 or less
- personal and household effects, not in
commercial quantity, for personal use
2. Formal entry
-may be for immediate consumption, or
under irrevocable domestic letter of credit,
bank guarantee or bond for:
a. placing article in customs bonded
warehouse
b. constructive warehousing and
immediate transportation to other Phil
ports upon proper examination and
appraisal
c. constructive warehousing and
immediate exportation
Written Declaration of Import Entry must contain
statements that declare:
1. full account of value or price
2. the invoice and entry contains just and
faithful account of the value or price of
articles; nothing has been omitted or
concealed
3. to the best of knowledge of declaring, all
the invoices and B of L are the only ones in
existing in relation to the importation in
question
4. the invoices, entries and B of L are
genuine and true
 signed by importer, consignee or holder of
bill, manager of corporation, firm or
association, licensed customs broker
Form of Import Entry:
 shall be signed by person making entries
 have required number of copies as
prescribed by RR
Contents:
 name of importing vessel or aircraft
 # and marks of packages,
 quantity
 152 |TAXATION LAW REVIEWER
 description of article
 value set in the invoice
C. Examination, Appraisal and Classification
(§1405-08)
Procedure:
1. appraisers shall ascertain, estimate,
determine the value or price of articles
 file action within 1 year
2. examiners shall render a report
3. appraisers shall describe all articles on the
face of entry in tariff
 15 days
An appraisal, fully passed upon and approved by
Collector, may not be altered or modified except:
1. statement of error
2. request for reappraisal and/or classification
3. if duty assessed amount is lower than the
entered value
D. Assessment of Taxes
E. Liquidation (§1601-03)
Liquidation shall be made on the face of entry
showing the particulars.
Daily record of entries liquidated shall be posted
on the public corridor of customs house.
Tentative Liquidation - if to determine the exact
amount due some future action is required,
liquidation is deemed tentative as to items
affected and shall be subject to future and final
adjustment and settlement within 6 months
Finality of Liquidation: After expiration of 1 year
from date of final payment of duties
In the absence of protest, final and conclusive
between the parties unless liquidation was
tentative.
FLEXIBLE TARIFF CLAUSE
Flexible Power of the President
 Section 28(2), Article VI, Constitution: The
Congress may, by law, authorize the
President to fix within specified limits, and
subject to such limitations and restrictions as
it may impose, tariff rates, import and export
quotas, tonnage and wharfage dues, and other
duties or imposts within the framework of the
national development program of the
Government.
 Section 401, Tariff and Customs Code:
In the interest of national economy, general
welfare and/or national security, the
President upon recommendation of the
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
National Economic and Development
Authority, is empowered:
1. To increase, reduce, or remove existing
protective rates of import duty, provided
that the increase should not be higher
that 100% ad valorem;
2. To establish import quota or to ban
imports or any commodity; and
3. To impose additional duty on all imports
not exceeding 10% ad valorem
NOTE: An order issued by the President
pursuant to the flexible tariff clause shall
take effect thirty (30) days after
promulgation, except in the imposition of
additional duty not exceeding ten percent
(10%) ad valorem which shall take effect at
the discretion of the President.
In the case of imposition of additional duty,
the investigation of the Tariff Commission
and recommendation of NEDA are needed.
LIMITATIONS TO THE FLEXIBLE TARIFF
CLAUSE
1. Conduct by the tariff commission of an
investigation in a public hearing.
The Commission shall also hear the views and
recommendations of any government office,
agency or instrumentality concerned. The
commission shall submit their findings and
recommendations to the NEDA within 30
days after the termination of the public
hearing. The NEDA thereafter submits the
recommendation to the president.
2. The power of the president to increase or
decrease the rates of import duty within the
abovementioned limits fixed in the code shall
include the modification in the form of duty.
In such case the corresponding ad valorem or
specific equivalents of the duty with respect
to the imports from the principal competing
foreign country for the most recent
representative period shall be used as bases
(Sec. 401, TCC).
REQUIREMENTS OF IMPORTATION
Who are authorized to make an import entry?
1. The importer being holder of the bill of
lading;
2. A customs broker acting under authority of the
holder of the bill; or a person duly empowered
to act as agent or attorney-in-fact
Import entry – a declaration to the BOC showing
the description, value, tariff classification and
other particulars of the imported article to enable
the customs authorities to determine the correct
customs duties and internal revenue taxes due on
the importation

OBLIGATIONS OF IMPORTER
1. Cargo manifest
2. Import entry
 An importer is required to file an import
entry. It must be accomplished from
disembarking of the last cargo from the
vessel.
3. Declaration of correct weight or value
4. Liability for payment of duties
 It constitutes a personal debt due from
the importer to the government which
can be discharged only by payment in full
of all duties, taxes, fees and other charges
legally accruing.
 It constitutes a lien upon the articles
imported which may be enforced while
such articles are in custody or subject to
the control of the government.
 The Code provides that all articles
imported into the Philippines shall be
held to be the property of the person to
whom the same are consigned: and the
holder of the bill of lading duly endorse by
the consignee thereof therein named, or if
consigned to order by the consignor, shall
be deemed the consignee thereof. The
underwriters of abandoned articles and
the salvors of articles saved from a wreck
at sea, along a coast, or in any area of the
Philippines, maybe regarded as the
consignees (Section 1203, Tariff and
Custom Code)
5. Liquidation of duties
 The liquidation shall be made on the face
of the entry showing the particulars
thereof if the collector shall approve the
returns of the appraiser and report of the
weight, gauge or quantity.
 The liquidation shall be initiated by the
liquidating clerk, approved by the chief
liquidator and recorded in the record of
liquidations.
 A daily record of all entries liquidated
shall be posted in the public corridor of
the customhouse, stating the name of the
vessel or aircraft, the port from which she
arrived, the date of her arrival, the name
of the importer, and the serial number
and date of the entry. A daily record
must also be kept by the collector of all
additional duties, taxes and other
charges found upon liquidation, and
notice shall promptly be sent to the
interested parties.
6. Keeping of records
153
 All importers are required to keep all
records of their importations and book of
accounts, business and computer
systems, and all customs commercial
data including payment records at their
principal place of business for a period of
3 years from the date of importation.
 Brokers are required to make copies of
the abovementioned records at their
principal place of business and for a
period of 3 years from the date of
importation.
 After the 3 year period, the liquidation
becomes final except in cases of tentative
liquidation.
IMPORTATION IN VIOLATION OF TCC
SMUGGLING OR UNLAWFUL IMPORTATION
Any person who shall fraudulently import or bring
into the Philippines, or assist in doing so, any
article, contrary to law, or shall receive, conceal,
buy, sell, or in any manner facilitate the
transportation, concealment, or sale of such
article after importations, knowing the same to
have been imported contrary to law, shall be guilty
of smuggling. (Sec. 3601, TCC)
FRAUDULENT PRACTICES (Criminal Offense)
against Custom Revenues under Sec. 3602
a. Entry of imported articles by means of any
false or fraudulent invoice;
b. Entry of goods at less than the true weight or
measure;
c. Filling of any false or fraudulent entry for the
payment of drawbacks or refund of duties.
CLASSIFICATION OF GOODS
Articles Subject to Customs Duties
Articles, when imported from any foreign country
into the Philippines, shall be subject to duty upon
each importation, even though previously
exported from the Philippines, EXCEPT as
otherwise specifically provided for in this Code or
in other laws. [SEC. 100, TCC]
Merchandise – the Revised Administrative Code
defines merchandise, when used with reference to
importation or exportation, to include goods, wares
and in general, anything that may be the subject of
exportation. Checks, money orders and dollar bills
properly within the concept of merchandise as used in
Revised Administrative Code, are merchandise.
[Bastida vs. CIR]
KINDS OF GOODS/MERCHANDISE
1. Articles subject to duty (Dutiable Goods)
2. Prohibited importation
3. Conditionally-free importations
 154 |TAXATION LAW REVIEWER

DUTIABLE/TAXABLE GOODS
(AFP-CPP-NPA-VMH-FAT-WE-MAMO) Articles the importation of which is exempt from
payment of import duties only upon compliance
1. Animals and animals product with the formalities prescribed, conditions
2. Animal or vegetable Fats; oil and their imposed and/or with the regulations promulgated
cleavage products under the Tariff and Customs Code of the
3. Prepared foodstuffs; beverages, spirits and Philippines, as amended, issued by the
vinegar; tobacco and manufactured tobacco Commissioner of customs with the approval of the
4. Products of Chemical or allied industries Secretary of Finance.
5. Plastic and rubber articles
6. Pulp or wood; (PSST-BAR-FEW-PERA-SAM-CPP-VICE)
7. Natural or cultural stones 1. Professional instruments and implements
8. Plaster, cements and other related articles 2. Sea store supplies to the vessel or aircraft
9. Arms and ammunitions 3. Salvage articles recovered from an abandoned
10. Vegetable products vessel
11. Mineral products 4. Trailer chassis by a shipping company
12. Hides ( skin, fur, leather) 5. Books
13. Footwear, headgear, etc. 6. Aquatic products
14. Aircraft, vessels, vehicles and all other mode 7. Relief organization and articles used for relief
of transportation operations
15. Textile and textile products 8. Film production by foreign media or movie
16. Wood and related articles outfit
17. Electrical and mechanical machineries 9. Equipment used in salvaging vessels
18. Metals 10. Wearing apparels
19. Artworks, antique 11. Personal and household effects
20. Manufactured/miscellaneous articles 12. Importation for the use of foreign Embassies
21. Optical products, medical and surgical 13. Receptacles, containers holders and other
products [Sec. 104, Title 1, TCC] similar boxes
14. Animals, EXCEPT race horse
PROHIBITED IMPORTATIONS 15. Samples of any kind
(HOT-DOG-TAMAD) 16. Articles for repair, re-conditioning for export
17. Mining equipment and tools
18. Cost of repair made abroad upon a vessel
1. Heroine, marijuana and other dangerous
registered in the Philippines
drugs, narcotics and pharmaceutical products
19. Articles which are previously exported but
EXCEPT when made by the government
returned in the Philippines
designed for medical purpose
20. Prizes, medals, trophies, badges and other
2. Opium pipes and other drugs paraphernalia
thing bestowed as an award
3. Written or printed materials containing any
matter advocating of inciting Treason,
21. Vessels spare part of foreign vessel and
sedition, rebellion materials
aircraft
4. Dynamite, ammunition and other explosive
22. Articles which are Imported subsequently in
weapons EXCEPT when authorized by law
the Philippines
5. Written or printed articles involving Obscene
23. Coffin, caskets
or immoral character
24. Exhibition, competition articles for display
6. Gambling Devices
7. Lottery and sweepstakes Tickets EXCEPT
NOTE: These articles which are exempt from
those authorized by the Philippine
import duties upon compliance with the
Government
formalities prescribed in or with regulations
8. Articles, instruments, drugs and substances
promulgated by the Commissioner of Customs
designed and intended to produce unlawful
with the approval of the Sec. of Finance.
Abortion and printed materials promoting
unlawful abortion
9. Articles made of precious Metal but actual
fineness of quality not indicated CLASSIFICATION OF DUTIES
10. other Articles (P.D. 34)
11. Any Adulterated or misbranded drug in Ordinary or Regular Customs Duties
violation of the Food and Drugs Act.(Sec. Imposed and collected merely as a source of
102,TCC) revenue
a. Ad Valorem - the duty is based on the market
NOTE: All the above merchandise/goods cannot value or price of the imported article.
be brought in or out of the Philippines. 1. transaction value
2. transaction value of identical goods –
CONDITIONALLY-FREE IMPORTATION goods are the same in all respects.

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012


3. transaction value of similar goods – not
alike in all respects, but:
- must have like characteristics and
component materials
- must perform the same function
- interchangeable
- similar quantity & reputation
- trademarks must be considered
4. deductive value
5. computed value
6. other reasonable means or fallback value
b. Specific - the duty is based on the weight or
volume of the imported article.
Special Customs Duties
Imposed and collected in addition to ordinary
customs duties usually to protect local industries
against foreign competition.
1. Dumping Duty – imposed upon foreign
products with value lower than their fair
market value to the detriment of local
products.
Rate: difference between the actual price and
the normal value of the article.
Imposing authority: Special Committee on
Anti-Dumping composed of the Sec. of
Finance as chairman; members: Secretary of
Trade and Industry; and either the Secretary
of Agriculture, if the article in question is
agricultural product or the Secretary of
Labor, if non-agricultural product.
Elements of Dumping:
a. like product
b. price difference
c. injury
d. causal link
NOTES:
There must be a deliberate and continuous
sale of imported article in the Philippines as
price lower than the prices in the exporting
country.
This must prejudice or cause or likely to cause
injury to our local industry.
Illustration: There are articles of foreign origin
the prevailing price of which in the US is
equivalent to P100. These articles are sold or
dumped in the Phils. at lower than the prevailing
price in the US because they are saleable in the
U.S.
So, this will prejudice our local industries. In order
to protect our local product or to discourage people
from buying this imported product, we should
155
impose special duties in addition to the regular
duties. Dumping duties should be imposed.
2. Countervailing Duty – imposed upon foreign
goods enjoying subsidy thus allowing them to
sell at lower prices to the detriment of local
products similarly situated.
Rate: equivalent to the bounty, subsidy or
subvention
Imposing authority: Secretary of Finance
 Bounty is the cash award paid to an
exporter or manufacturer while subsidy
refers to fiscal incentives, not in the form
of direct cash award, to encourage
manufacturers; or
 The duty is equal to the ascertained or
estimated amount to the bounty or
subsidy
Elements of Countervailing:
a. product comparability
b. subsidy
c. injury
d. causal link
Illustration: Sometimes imported products
enjoy certain subsidy from their government.
So, they have an advantage. Our local
products for example, do not enjoy similar
subsidy. We should counter that advantage by
imposing countervailing duties. The purpose
there is to protect our local products against
unfair competition.
This represents the inland excise tax on
locally manufactured articles of the same
kind to off-set this advantage.
As regards dumping duties, the extent of the
special duty is the amount that represents
under-pricing
As regards countervailing duties, the extent is
the excise inland tax or the amount of
advantage enjoyed by that imported article.
3. Marking Duty- imposed upon those not
properly marked as to place of origin of the
goods.
Rate: 5% ad valorem of articles
Imposing authority: Commissioner of
Customs
 The purpose is to prevent deception of
consumers.
 The articles must be properly marked,
otherwise a special duty of 5% of the
 156 |TAXATION LAW REVIEWER
value shall be imposed. [Sec. 303, Tariff
and Customs Code].
4. Retaliatory/Discriminatory Duty- imposed
upon goods coming from countries that
discriminate against Philippine products.
DUMPING
DUTY
Imposed upon foreign
products with value lower
than their FMV to the
detriment of local
products.
Difference between the
actual price and the
normal value of the article
Special Committee on
Anti-Dumping
Chairman-Secretary of
Finance
Members:
DTI Secretary, and
either Secretary of
Agriculture or Secretary of
Labor
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
Rate: any amount not exceeding 100% ad
valorem of the subject articles
Imposing authority: President of the
Philippines
DISTINCTIONS BETWEEN SPECIAL DUTIES
DRAWBACK
It is a device resorted to for enabling a commodity
affected by taxes to be exported and sold in foreign
markets upon the same terms as if it was not been
taxed at all. It may be full or partial.
 The return of 99% of customs paid on
imported articles when they are re-exported
forming part of domestically produced
articles.
 The refund of 99% duty on imported fund
when used for propulsion vessels engaged in
the foreign or coastwise trade.
COUNTERVAILING MARKING DISCRIMINATORY
DUTY DUTY DUTY
As to Nature
Imposed upon foreign Imposed upon those Imposed upon goods
goods enjoying subsidy not properly coming from countries
thus allowing them to marked as to place that discriminate
sell at lower prices to of origin of the against Philippine
the detriment of local goods. products.
products similarly
situated.
As to Amount or Rate
Equivalent to the 5% ad valorem of Any amount not
bounty, subsidy or articles exceeding 100% of the
subvention. subject articles
As to Imposing Authority
Secretary of Finance Commissioner of President of the
Customs Philippines
When Drawbacks Allowed
Drawbacks are allowed on the following
commodities:
1. Fuel used on propulsion vessels;
2. Petroleum oils and oils obtained from
bituminous minerals, etc., eventually used for
generation of electric power and manufacture
of city gas; and

3. Articles made of imported materials upon the
exportation of articles manufactured or
produced in the Philippines subject to certain
conditions.
CONDITIONS FOR GRANT OF DRAWBACK
1. Imported material was actually used in the
production of article to be exported.
2. Refund or credit shall not exceed 100% of
duties paid on the imported material.
3. No determination by NEDA of the requirement
for certification on non-availability of locally
produced or manufactured competitive
substitutes for the imported material (no local
substitute for the materials).
4. Exportation must be made within 1 year after
importation of material and claim for refund or
credit must be made within 6 months from
exportation.
5. When 2 or more result from the used of same
imported material, apportionment shall be
made.
 Every application for drawback must pay
P500 filing, processing, and supervision
fees
 Claims shall be paid by BOC within 60
days after receipt of properly
accomplished claims
THE TARIFF COMMISSION
FUNCTION OF THE TARIFF COMMISSIONS
I. Investigative Powers
a) The administration of and the fiscal and
industrial effects of the tariff and customs
laws of this country now in force or which
may hereafter be enacted.
b) The relations between the rates of duty on
raw materials and the finished or partly
finished products.
c) The effects of ad valorem and specific duties
and of compound specific and ad valorem
duties.
d) All questions relative to the arrangement of
schedules and classification of articles in
the several schedules in the tariff law.
e) The tariff relations between the Philippines
and other foreign countries’ commercial
treaties, preferential provisions, economic
alliances, the effect of export bounties and
preferential transportation rates.
f) The volume of importations compared with
domestic production and consumption; and
157
g) In general, to investigate the operation of
customs and tariff laws, including their
relation to the national revenues, their
effect upon the industries and labor of the
country and to submit reports of its
investigation as provided. (Sec. 506, TCC)
II. Administrative Assistance to the President and
Congress (Sec. 506, TCC)
TAX REMEDIES UNDER TARIFF AND
CUSTOMS CODE
REMEDIES OF THE GOVERNMENT
A. Administrative/ Extrajudicial
1. Tax Lien (Sec. 1204, TCC)
 Attaches on the goods, regardless of
ownership, while still in the custody or
control of the Government.
 Availed of when the importation is
neither prohibited nor improperly
made.
 Enforcement of tax lien: (Sec. 1508)
When an importer has an outstanding
and demandable account with the
Bureau of Customs,
Collector shall hold the delivery of the
article and upon notice, he may sell
such importation or a portion of it to
satisfy the obligation
Importer may settle his obligation
anytime before the sale.
2. Administrative Fines and Forfeitures
 Applied when the importation is
unlawful,
 it may be exercised even where the
articles are not or no longer in custom’s
custody. UNLESS the importation is
merely attempted in which case it may
be effected only while the goods are still
within the Customs jurisdiction or in
the hands of a person who is aware
thereof. (Sec. 2531 and 2530, TCC)
 Under Sec. 2530 (a), TCC in order to
warrant forfeiture, it is not necessary
that the vessel or aircraft must itself
carry the contraband. The
complementary if collateral use of their
Cessna plane for smuggling operation
is sufficient for it to be deemed to have
been used in smuggling. (Llamado vs.
 158 |TAXATION LAW REVIEWER
Commissioner of Customs, G.R. No. L-
28809, May 16, 1983)
3. Reduction of Custom Duties/
Compromise
Subject to approval of Sec. of Finance
(Sec. 709, 2316, TCC)
4. Seizure, search, and arrest (Sec. 2205,
2210, 2211, TCC)
Seizure and Forfeiture Cases
These refer to the matters involving smuggling. It
is administrative and civil in nature and is
directed against the res or imported articles and
entails a determination of the legality of
importation.
NOTE: These are actions in rem.
Seizure and Forfeiture:
 Collector issues warrant for the detention of
the goods. Formal hearing is set, and the
importer is notified thereof.
 Available only when the importation is
unlawful or irregularly made.
 Available even when the goods are no longer
in custody of the Bureau. Available even when
the goods are already in the hands of an
innocent purchaser who knew nothing of the
illegality of the importation. Good faith is
immaterial as far as the seizure is concerned.
It is however, a valid defense in a criminal
prosecution.
 While pending with the collector of customs,
the courts cannot interfere with the seizure
and forfeiture. The CTA must wait for the
appeal.
Q. What is the nature and purpose of seizure
proceeding under the TCC?
A. They are actions in rem directed against the
property seized, not against the owner
thereof. In such action, the property itself is
the defendant. The title of the case is, for
instance, Republic of the Philippines vs. Two
(2) Honda Accord Motor Vehicles. There is an
actual trial as in the case of Judicial
Proceedings.
Procedure in seizure cases of imported articles:
1. The Collector issues a warrant for the
detention or forfeiture of the imported articles
2. The Collector gives the importer a written
notice of the seizure and fixes a hearing date to
give to importer an opportunity to be heard
3. A formal hearing is conducted
4. The Collector renders a declaration of
forfeiture
5. The importer aggrieved by the action of the
Collector in any case of seizure may appeal to
the Commissioner for review within 15 days
from written notice of the collector’s decision
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
6. The importer aggrieved by the action or ruling
of the Commissioner in any case of seizure may
appeal to the CTA.
7. The importer may proceed on appeal to the SC
as the case may be.
Q. Under what ground may the Collector of
Customs issue Warrant of Seizure and
Detention of articles under the TCC?
A. Issuance of the Warrant of Seizure and
Detention must be based upon probable
cause that the articles in question were
imported or attempted to be exported
contrary to the Tariff and Customs Law.
Q. What are the requisites for the settlement of
seizure case through the payment of fine?
A.
1. The seizure case is pending adjudication
with the Collector of Customs
2. There is no fraud in the importation or
exportation of the article in question.
3. The owner, exporter, importer or
consignee or his agent shall offer to pay
the fine imposed upon the property, and
4. The fine imposable must be in an amount
not less than 20% or more than 80% of the
landed cost of the imported seized article
or the FOB value of the seized article for
export
5. The property under seizure is not
absolutely prohibited nor the release
thereof is not contrary to law and
6. The settlement must be subject the
approval of the Commissioner of
Customs.
Q. What are the requisites of forfeiture of goods
under the Tariff Code?
A.
1. Wrongful making by the owner, importer,
exporter or consignee of any declaration
or affidavit, or the wrongful making or
delivery by the same person of any
invoice, letter or paper-all touching on
the importation or exportation of
merchandise
2. The falsity of such declaration, affidavit,
invoice, letter o paper and intention on
the part of the imparter or consignee to
evade the payment of the duties due.
3. The fraud must be proved to justify
forfeiture. It must be actual amounting to
an intention of wrong doing with the clear
purpose of avoiding the tax. (Republic vs.
CTA, G.R. No. 139050. October 2, 2001)
Q. What is the extent of the jurisdiction of the
Commissioner of Customs in forfeiture
proceedings?

A. The Commissioner of Customs when sitting in
forfeiture proceedings constitutes a tribunal
upon which the law confers jurisdiction to
determine all questions touching the
forfeiture and further disposition of the
illegally imported merchandise. (Auyong
Hian vs. CTA, 59 SCRA 110, September 12,
1974)
NOTE: In all proceedings taken for the seizure
and/or forfeiture of any vehicle, vessel, aircraft,
beast or articles under the provisions of the tariff
and customs laws, the burden of proof lies upon
the claimant. It is required that probable cause be
first shown for the institution of such proceedings
and the seizure and /or forfeiture was made under
the circumstances and in the manner prescribed
by the Tariff and Customs Code.
Right of Custom Officers to Effect Seizure and
Arrest
1. May seize any vessel, aircraft, cargo, article,
animal or other movable property when the
same is subject to forfeiture or liable for any
time as imposed under TCC, rules and
regulation
2. May exercise only in conformity with the laws
and the TCC. (Sec. 2205, TCC)
Articles subject to Seizures and Forfeitures (FEU-
UE-UM-UP-BIR)
1. Fraudulent removal of cargoes
2. Excessive sea store
3. Undeclared cargoes
4. Unlawful use of aircraft or vessel EXCEPT if
there is Certificate of Public Convenience and
Necessity
5. Excessive cargoes
6. Unlawful transfer of cargoes
7. Money used to bribe
8. Unauthorized removal of goods
9. Prohibited articles
10. Beast, actually used for the consequence that
is subject of forfeiture
11. Instruments used in the loading or unloading
of goods subject of forfeiture
12. Receptacles, boxes used to conceal goods
subject of forfeiture (Sec. 2530,TCC)
Article not subject to forfeiture or seizure:
The forfeiture of vessel or aircraft or seizure of
articles shall not be effected if it is established
that the owner thereof or his agent in charge of the
means of conveyance used as aforesaid has no
knowledge of a participation in the unlawful act.
In other words, no forfeiture or seizure in the
absence of prima facie evidence.
However, a prima facie presumption shall exist
against the vessel, vehicle or aircraft under any of
the following circumstances:
1. if the conveyance has been used for smuggling
at least twice before;
159
2. if the owner is not in the business for which
the conveyance is generally used; and
3. if the owner is financially not in a position to
own such conveyance.
Doctrine of Primary Jurisdiction Over Seizure and
Forfeiture Cases
 the exclusive jurisdiction in seizure and
forfeiture cases vested in the collector of
customs precludes a regular court from
assuming cognizance of such matter.
 the BOC acquires exclusive jurisdiction over
imported goods, for the purpose of
enforcement of the customs laws, form the
moment the goods actually in its possession or
control, even if no warrant of seizure or
detention had previously been issued by the
Collector of Custom in connection with
seizure and forfeiture proceedings.
 the RTC does not have jurisdiction over
seizure and forfeiture proceedings conducted
by the BOC. Even if a Custom seizure is
illegal, exclusive jurisdiction still belongs to
the BOC. (Jao vs. CA, G.R. No. 104604,
October 6, 1995)
Pertinent Cases on Doctrine on Primary
Jurisdiction:
 The Collector of Customs, when sitting in
forfeiture proceedings, constitutes a tribunal
upon which the law expressly confess
jurisdiction to hear and determine all
questions touching on the forfeiture and
further disposition of the illegal imported
mechanics (Government of the P.I. vs. Gale,
24 Phil 95; Auyong Hian vs. CTA, 19 SCRA
10).
 Jurisprudence is replete with cases which
have held that regional trial courts are devoid
of any competence to pass upon the validity of
seizure and forfeiture proceedings conducted
in the Bureau of Customs and to enjoin, or
otherwise interfere with these proceedings.
The Collector of Customs sitting in the seizure
and forfeiture proceedings has exclusive
jurisdiction to hear and determine all
questions touching on the seizure and
forfeiture proceedings of dutiable goods. The
regional trial courts are preclude from
assuming cognizance over such even though
petition for certiorari, prohibition, or
mandamus.
 Even if a Customs seizure is illegal, exclusive
jurisdiction still belongs to the Bureau of
Customs (Jao, et. al vs. CA, supra).
To seize or not to seize is discretionary on
Customs, so mandamus does not lie. However, in
case of grave abuse by customs, petitioner can file
certiorari proceedings (Provident Tree Farms, Inc.
vs. Batario, Jr. etc et. al G.R. No. 92285, March 28,
1994).
 160 |TAXATION LAW REVIEWER

Protest vs. Seizure NOTE: In Assali vs. Commissioner, 27 SCRA 312,

the Supreme Court held as valid the interception
PROTEST SEIZURE and seizure of a vessel on the high seas, saying
Issue Validity or Validity or that the authority of a nation within its territory
propriety of legality of is absolute and exclusive. The power to secure
assessment of importation itself from injury may certainly be exercised
goods beyond the limits of its territory.
Proof 1. Collector is No probable
required wrong. cause exists Places Where Searches and Seizures may be
2. Assessment regarding the Conducted
and illegality of 1. Right of police officer to enter enclosure
classification. the WITHOUT a warrant, EXCEPT a dwelling
importation. i. house
Procedure Payment Warrant of 2. Search within a dwelling house must be with
seizure proper warrant
15 days 3. right to search vehicles or aircrafts and person
After hearing or articles conveyed therein
Protest before decision by 4. Right to search vehicles, beast and person
collector the collector 5. Search of person arriving from foreign
countries
15 days 15 days
Settlement of Forfeiture Cases
Commissioner Commissioner
of Customs of Customs General Rule: Settlement of cases by payment of
fine or redemption of forfeited property is
30 days 30 days allowed.

CTA CTA The District Collector subject to the approval of

En En the Commissioner may, while the case is
banc banc pending:
15 days 15 days
SC SC 1. Accept the settlement of any seizure case
provided that the owner, importer, exporter or
consignee or his agent shall offer to pay to
Doctrine of Hot Pursuit
Requisites:
the Collector a fine imposed by him upon the
1. Over Vessels: property
a. an act is done in Philippine waters in
violation of the Tariff and Customs 2. In case of forfeiture, the owner, exporter,
Code. importer or consignee or his agent shall offer
b. a pursuit of such vessel began within the to pay for the domestic market value of the
jurisdictional waters which may seized article.
continue beyond the maritime zone and
the vessel may be seized on the high Exceptions:
seas. 1. the importation is absolutely prohibited or
2. the release of the property to the person
2. Over Imported Articles: offering to redeem would be contrary to law or
a. there is a violation of TCC 3. when there is fraud in. (Sec. 2307,TCC)
b. they may be pursued in the Philippines
by land, water, or air NOTES:
c. such jurisdiction exerted over them at Acquittal in a criminal charge is not res judicata
any place therein necessary for the in seizure or forfeiture proceedings.
enforcement of the law. (2nd par. Sec. 603,
TCC) Since criminal proceeding are actions in personam
while the latter is action in rem.
Jurisdiction of the BOC - The BOC shall have the
right of supervision and police authority over all Burden of proof in seizure or forfeiture case is on
seas within the jurisdiction of the Philippines and the claimant. (sec. 2535, TCC)
over all coasts, ports, airports harbor, bays, rivers
and inland waters whether navigable or not from SURCHARGE - To overcharge or to charge again
the sea. (Sec. 603, TCC) as in an accounting between parties

Articles subject to surcharge (DEMI)

FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012

 161

1. Failure to pay Duties (Sec. 2501,TCC) Actual seizure of the articles

2. Failure or refusal of a party to submit 
Evidence (Sec. 2504,TCC) Listing of description, appraisal and
3. Misclassification, misdeclaration or under classification of seized property
evaluation of article 
4. Failure to submit or supply Invoice (Sec. Report of seizure to the Comm. of Customs and
2502, TCC) the Chairman, Comm. on Audit

Issuance by the Collector of a warrant of
FINES
detention
Articles subject to fine (BRUCE)

1. Breach or a Notification to owner or importer
2. Failure to supply or manifest requirements 
provided by law (Sec. 2521, TCC) Formal hearing
3. Unlawful loading and unloading of cargoes 
(Sec. 2524, 2517,TCC) District collector renders his decisions
4. Failure to produce all the crew members
5. Failure to exhibit the documents related to  
the vessel (Sec. 2519, 2507, 2508-2514, TCC) If decision is not If decision is not
favorable to the favorable to the
B. Judicial aggrieved owner or government
1. this remedy is normally availed of when importer
the tax lien is lost by the release of the  
goods Appeal by the Automatic Review by
 Civil Action (Sec. 1204, TCC) aggrieved owner or the Commissioner
 Criminal Action importer

When the goods are properly released and thus

beyond the reach of tax lien, the government can
seek payment of tax liability through judicial
action since the tax liability of the importer
constitutes a personal debt to the government,
therefore enforceable by action. In this case,
REMEDIES OF THE TAXPAYER
judicial remedy is normally availed of instead of
A. Administrative
the administrative remedy.
1. Protest
Q. Is Judicial Remedy for tax collection available
under the TCC?
 Any importer or interested party, if
A. Only civil action for collection is available.
dissatisfied with published value
Criminal action is not available. Only in the
within 15 days from date of
NIRC is there recovery of taxes through
publication or within 5 days from the
criminal suit.
date of importer is entitled to refund,
if payment is rendered erroneous or
Rules on Appeal Including Jurisdiction
illegal by events occurring after the
The party aggrieved by a ruling of the
payment.
Commissioner in any matter brought before him
upon protest or by his action or ruling in any case
 Taxpayer within 15 days from
of seizure may appeal to the Court of Tax Appeals,
in the manner and within the period prescribed by assessment (Sec. 2308, 2210, TCC)
law and regulations. Unless an appeal is made to
the Court of Tax Appeals in the manner and NOTE: Payment under protest is
within the period prescribed by laws and necessary.
regulations, the action or ruling of the
Commissioner shall be final and conclusive. 2. Abatement and Refund

 A written claim for refund may be

ADMINISTRATIVE AND JUDICIAL
submitted by the importer in
PROCEDURES RELATIVE TO CUSTOMS
abatement cases on missing packages,
SEIZURES AND FORFEITURES
deficiencies in the contents of
packages or shortages before arrival
Determination of probable cause and issuance of of the goods in the Philippines,
warrant articles, lost or destroyed after such

 162 |TAXATION LAW REVIEWER
arrival, dead or injured animals, and
for manifest clerical errors; and
 Drawback cases where the goods are
re-exported (Sec. 1701-1708, TCC)
3. Settlement of any seizure by payment of
fine or redemption
 But this shall not be allowed in any
case where importation is absolutely
prohibited or the release would
contrary to law, or when there is an
actual and intentional fraud. (Sec.
2307, TCC)
4. Appeal
 Within 15 days to the Commissioner
after notification by Collector of his
decision. (Sec. 2313, TCC)
B. Judicial
1. Appeal
Within 30 days from receipt of decision
of the Commissioner or Secretary of
Finance to the division of the CTA (Sec.
2403, TCC, Sec. 7, R.A. 1125, as
amended by Sec. 9, R.A. 9282)
 The CTA empowers to issue
injunction, it would appear that an
importer may appeal without first
paying the duties, such as in seizure,
but not in protest cases.
2. Action to question the legality of seizure
3. Abandonment
a. Expressly (Sec. 1801 TCC)
b. Impliedly (Sec. 1801 TCC)
Failure to file an import entry within 30 days
from the discharge of goods or having filed an
entry fails to claim within 15 days but it shall
not be so effective until so declared by the
collector. (Sec. 1801, as amended by R.A.
7651)
Abandonment – it is the renunciation by an
importer of all his interest in the property rights
in the imported article. It may be express or
implied.
Express Abandonment
When the owner, importer or consignee of the
imported article expressly signifies in writing and
under oath to the Collector of Customs his
intention to abandon his shipment in favor of the
government, within ten days after filing of the
import entry, he shall be relieved from payment of
duties, taxes and other charges and expenses.
FAR EASTERN UNIVERSITY  CENTRALIZED BAR OPERATIONS 2012
 Article shall be delivered by the owner,
importer or consignee at such place which the
Collector designates; failure to comply shall
make him liable for expenses that may be
incurred in connection with the disposition
thereof.
Implied Abandonment
When the owner, importer, consignee or
interested party, after due notice, fails to file an
entry within thirty (30) days, which shall not be
extendible, from the date of discharge of the last
package from the vessel or aircraft; OR
Having filed an entry for his shipment, the owner,
importer or consignee, or other interested party
fails to claim his importation within fifteen (15)
days, which shall not be extendible, from the date
of posting of the notice to claim such importation.
Effects of Abandonment
1. Owner, importer, consignee or other
interested party deemed to have renounced
all of his interests and property rights over
the articles.
2. Abandoned article shall be ipso facto deemed
the property of the government and shall be
disposed of in accordance with the provisions
of the Code.
It does not relieve owner or importer from any
criminal liability which may arise from any
violation of law committed in connection with the
importation of the abandoned article.
Nature of Customs Protest; Seizures and
Forfeiture cases
There are two kinds of proceedings in the Bureau
of Customs, these are:
a. Customs protest cases- deal safely with
liability for customs, duties, fees and
other charges.
b. Seizure and forfeiture cases- refer to
matters involving smuggling or the act of
any person who fraudulently imports or
brings into the Philippines, or assists in
so doing, any article contrary to law, or
shall receive, conceal, buy, sell or in any
manner facilitate the importation,
concealment, or sale of such auricles after
importation, knowing the same to have
been imported contrary to law smuggling
includes the exportation act of articles in
a manner contrary to law. (Sec. 3154,
TCC).
NOTE: Before filing a protest, there must first be
a payment under protest.

CUSTOMS PROTEST APPLICABLE
The customs protest is required to be filed
only in case the liability of the taxpayer for duties,
taxes, fees and other charges is determined and
the taxpayer disputes said liability.
WHEN CUSTOMS PROTEST NOT REQUIRED
Where there is no dispute, but the claim for refund
arises by reason of the happening of supervening
events such as when the raw material imported is
utilized in the production of finished products
subsequently exported and a duty drawback is
claimed.
Requirement for Making Protest
1. Must be in writing;
2. Must point out the particular decision or
ruling of the Collector of Customs to which
exception is taken or objection made
3. Must state the grounds relied upon for relief
4. Must be limited to the subject matter of a
single adjustment
5. Must be filed when the amount claimed is
paid or within 15 days after the payment
6. Protest must furnish samples of goods under
protest when required.
Procedure on Customs Protest Cases
1. The Collector shall cause all articles entering
the jurisdiction of his district and destined for
importation through his port to be entered at
the customhouse. He shall cause all such
articles to be appraised and classified, and
shall assess and collect the duties, taxes, and
other charges thereon, and shall hold
possession of all imported articles, upon
which duties, taxes, and other charges have
not been paid or secured to be paid, disposing
of the same according to law. (Section 1206,
Tariff and Customs Code)
2. The party adversely affected by the ruling or
decision of the Collector whereby liability for
duties, taxes, fees or other charges are
determined, may protest such ruling or
decision. (Section 2308, Tariff and Customs
Code)
3. The protest, which must be in writing, is filed
with the Collector within fifteen (15) days. No
protest shall be considered unless payment of
the amount due after final liquidation (i.e.
computation of the liability) has first been
made and the corresponding docket fee
actually paid.
4. Every protest shall be filed in accordance with
rules and regulations promulgated for the
purpose, and shall point out the particular
163
decision or ruling of the Collector to which
exception is taken or objection made, and
shall indicate with reasonable precision the
particular ground or grounds upon which the
protesting party bases his claim for relief.
(Section 2310, Tariff and Customs Code)
5. The scope of a protest shall be limited to the
subject matter of a single adjustment or other
independent transaction; but any number of
issues may be raised in a protest with
reference to the particular item or items
constituting the subject matter of the protest.
Single adjustment refers to the entire content
of one liquidation including all duties,
surcharges or fines incident thereto. (Section
2310, Tariff and Customs Code)
6. When a protest in proper form is presented,
the Collector shall issue an order for hearing
within fifteen (15) days from receipt of the
protest and hear the matter thus presented.
Upon the termination of the hearing, the
Collector shall render a decision within thirty
(30) days, and if the protest is sustained in
whole or in part, he shall make the
appropriate order, the entry re-liquidated if
necessary in seizure cases. (Sec. 2312)
7. The person aggrieved by the decision or action
of the Collector in any matter presented upon
protest may within fifteen (15) days after
notification in writing by the Collector of his
action or decision, give written notice to the
Collector and one copy furnished to the
Commissioner of his desire to have the matter
reviewed by the Commissioner. Thereupon,
the Collector shall forthwith transmit all
records of the proceedings to the
Commissioner, who shall approve, modify, or
reverse the action or decision of the Collector
and take such steps and make such orders as
may be necessary to give effect to his decision.
(Section 2313, Tariff and Customs Code)
8. If in any case involving the assessment of
duties, the Collector renders a decision
adverse to the Government, such decision
shall automatically be elevated to, and
reviewed by the Commissioner; and if the
Collector’s decision would be affirmed by the
Commissioner, such decision shall
automatically be elevated to, and be finally
reviewed by, the Secretary of Finance.
However, if within thirty (30) days from the
receipt of the record of the case by the
Commissioner or by the Secretary of Finance,
as the case may be, no decision is rendered by
either of them, the decision under review
shall become final and executory. Any party
aggrieved by either the decision of the
Commissioner or the Secretary of Finance
may appeal to the Court of Tax Appeals
within thirty (30) days from receipt of a copy
 164 |TAXATION LAW REVIEWER

of such decision. (Section 2315, Tariff and

  Except as provided above, the supervisory
authority of the Secretary of Finance over the
If decision is If decision is adverse Bureau of Customs does not extend to the
adverse to the to the government administrative review of the ruling of the
protestant Commissioner in matters appealed to the Court of
  Tax Appeals.
Appeal with the Automatic Review
Commissioner by the  Automatic review is intended to protect the
within 15 days Commissioner interest of the government in the collection of
from notice  taxes and customs duties in seizure and
 Automatic review by protest cases which, without such review,
Appeal with the the Secretary of neither the Commissioner nor the Secretary
Court of Tax Finance of Finance would probably know about.
Appeals Division   Automatic review as a procedural rule applies
within 30 days to both customs cases and seizure and
from notice forfeiture cases incident to smuggling or
unlawful importation or exportation.
 If decision of
 Likewise, supervisory authority is exercised
Appeal with the Commissioner or by the Commissioner on seizure and forfeiture
CTA en banc Secretary of Finance
cases while the case is still pending in the
 is adverse to the
Office of the Collector of Customs and before
Appeal by protestant, he may
the decision of the Collector becomes final.
certiorari with appeal to the CTA
the Supreme and SC under the
Burden of Proof in Protest Cases
Court within 15 same procedure on
days from notice. the left. In protest cases, the protestant has the burden of
proving the correctness of his contention for the
issue is not whether the Collector was wrong but
whether the importer is right.
Customs Code)

Incidentally, in case of appeals to the Court of Tax

Appeals from the decisions of the Secretary of
Finance as a consequence of the automatic review
by the Secretary of Finance of decisions
emanating from Customs, the thirty-day period of
appeal under Republic Act No. 1125 will
necessarily be counted from the receipt of the
decision of the Secretary of Finance.
Automatic review and supervisory authority of
Commissioner and Customs and Secretary of
Finance
 If in any case involving the assessment of
duties, the Collector renders a decision
adverse to the government; such decision
shall automatically be elevated to, and
reviewed, by the Commissioner.
 If the Collector’s decision would be affirmed
by the Commissioner, such decision shall be
automatically elevated to, and finally
reviewed, by the Secretary of Finance.
 However, if within thirty (30) days from
receipt of the record of the case by the
Commissioner or the Secretary of Finance, as
the case may be, no decision is rendered by
either of them, the decision under review
shall become final and executory.
Any party aggrieved by either the decision of the
Commissioner or the Secretary of Finance may
appeal to the Court of Tax Appeals within thirty
(30) days from receipt of a copy of such decision.
PROCEDURE IN CUSTOMS PROTEST
CASES
The Collector acting within his jurisdiction shall
cause the imported goods to be entered at the
customhouse

The Collector shall assess, liquidate, and collect
the duties thereon, or detain the said goods if the
party liable does not pay the same

The party adversely affected (the protestant) may
file a written protest on his foregoing liability
with the Collector within 15 days after paying
the liquidated amount (the payment under
protest rule applies)

Hearing within 15 days from receipt of the duly
presented protest. Upon termination of the
hearing, the Collector shall decide on the same
within 30 days
REASONS FOR AUTHOMARIC REVIEW OF
DECISIONS ADVERSE TO THE
GOVERNMENT
1. To protect the interest of the Government

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2. A favorable decision will not be appealed
by the taxpayer and certainly a Collector
will not appeal his own decision.
3. Lifeblood Theory
REGIONAL TRIAL COURTS (RTC)
vs.
BUREAU OF CUSTOMS (BOC)
 The RTCs do not have jurisdiction over
seizure and forfeiture proceedings conducted
by the BOC and to interfere with these
proceedings. The Collector of Customs has
exclusive jurisdiction over all questions
touching on the seizure and forfeiture of
dutiable goods.
 No petitions for certiorari, prohibition or
mandamus filed with the RTC will lie because
these are in reality attempts to review the
Commissioner's actuations. Neither replevin
filed with the RTC will issue.
Rationale: Doctrine of Primary Jurisdiction.
 Even if a Customs seizure is illegal, exclusive
jurisdiction (to the exclusion of regular
courts) still belongs to the Bureau of Customs
(Jao vs. Court of Appeals, GR No. 104604,
October 6, 1995).
GOODS IN CUSTOM’S CUSTODY BEYOND
REACH OF ATTACHMENT
Goods in the custom’s custody pending payment of
customs duties are beyond the reach of
attachment. As long as the importation has not
been terminated, the imported goods remain
under the jurisdiction of the Bureau of Customs.
(Viduya vs. Berdiago, GR No. L-29218, October 29,
1976)
PERSONS HAVING POLICE AUTHORITY TO
ENFORCE THE TARIFF & CUSTOMS LAWS
AND EFFECT SEARCHES, SEIZURES AND
ARRESTS (SEC. 2203, TCC)
1. officials of the BOC, district collectors, police
2. officers, agents, inspectors, and guests of the
BOC;
3. officers of the Phil. Navy and other members
of the AFP and national law enforcement
agencies when authorized by the
Commissioner of Customs
4. officials of the BIR on all cases falling within
the regular performances of their duties,
when the payment of internal taxes are
involved;
5. officers generally empowered by law to
effect arrests and execute processes of
courts, when acting under the direction of
the Collector.
REQUIREMENTS FOR CUSTOMS
FORFEITURE
1. The wrongful making by the owner, importer,
exporter or consignee of any declaration or
affidavit, or the wrongful making or delivery
by the same persons of any invoice, letter or
165
paper - all touching on the importation or
exportation of merchandise.; and
2. That such declaration, affidavit, invoice,
letter or paper is false. (Farolan, Jr. vs. Court
of Tax Appeals, GR No. 42204, January 21,
1993)
PERTINENT CASES ON FORFEITURES:
Acting Commissioner of Customs vs. CTA
The dismissal of the criminal charge in the fiscal’s
office against respondent Andrulis does not
constitute res judicata in the forfeiture
proceedings. Forfeiture is in rem, whereas a
criminal action is in personam. Conviction in the
criminal action is not a bar to forfeiture. Results
of a criminal proceeding being dependent on the
evidence therein will not necessarily influence
judgment in the forfeiture proceedings.
Llamado vs. Commissioner of Customs,
(123 SCRA 118)
A Cessna plane carrying persons engaged in the
smuggling of untaxed “blue seal” cigarettes,
landed at an airstrip in Alabat, Quezon Province.
The plane was also used to bring in “de gaza”
kerosene lanterns and kerosene used to light the
airstrip to facilitate the loading of the cigarettes.
The plane was subject to forfeiture pursuant to
Sec. 2530 (a) of the Tariff and Customs Code. It is
not necessary that the vessel or aircraft must
carry the contraband. It is not likewise essential
that the vessel or aircraft must come from a
foreign country.
Commissioner of Customs vs. CTA and Jose
Pascual, (138 SCRA 581)
The Supreme Court ruled that the forfeiture of
Pascual’s vessel used in the illegal importation of
untaxed cigarettes is justified. Forfeiture,
according to the Citing the case of Vierneya vs.
Commissioner of Customs (July 30, 1968), is in the
nature of proceedings in rem and is directed
against the res. The fact that the owner of the
vessel had no actual knowledge that the vessel
was illegally used does not render the vessel
immune from forfeiture. This is so because the
forfeiture action is against the vessel itself.
NOTE: The said vessel was duly authorized to
engage in coastwise trade but has no certificate of
public convenience.
Transglobe International Inc. vs. CA,
(G.R. No. 126634,January 25, 1999)
Forfeiture of seized goods in the Bureau
of Customs is a proceeding against the goods and
not against the owner. It is the nature of a
proceeding in rem, i.e. directed against the res or
 166 |TAXATION LAW REVIEWER
imported article and entails a determination of the
legality of their importation. In this proceeding, it
is in legal contemplation the property itself which
commits the violation and is treated as the
offender, without reference whatsoever to the
character or conduct of the owner.
PLACES WHERE SEARCHES & SEIZURES
MAY BE CONDUCTED
a. enclosures
b. dwelling house (there must be search
warrant issued by a judge)
c. vessels or aircrafts and persons or articles
conveyed therein
d. vehicles, beasts and persons
e. persons arriving from foreign countries.
NOTE: Burden of proof in seizure or forfeiture is
on the claimant. (Sec. 2535, TCC)
PERTINENT CASES ON SEARCHES AND
SEIZURES:
1) The legality of a search can be contested only
by the party whose rights have been impaired
thereby and that the objection to an unlawful
search and seizure is purely personal and
cannot be availed of by third parties. (Nasiad,
et al. vs. CTA, Nov. 29, 1994)
2) Warrants of seizure and detention issued by
the Collector of C covering the seizure of
imported goods are not general
warrants issued in violation of Section 3 (now
section 4), rule 126 of the Rules of Court.
Upon effecting the seizure of the goods, the
Bureau of Customs acquired exclusive
jurisdiction not only over the case but also
over the goods seized for the purpose of
enforcing the tariff and Customs laws. (Chia
vs. Acting Collector of Customs, Sept. 26,
1989)
3) The proceedings upon search warrants must
be absolutely legal, “for there is not a
description of process known to the law, the
execution of which is more distressing to the
citizen. Perhaps there is none which excites
such intense feeling in the consequence of its
humiliating and degrading effect.” The
warrants will always be construed strictly
without however, going the full length of
requiring technical accuracy. No
presumptions of regularity are to be invoked
in aid of process when an officer undertakes
to justify under it. (Uy vs. BIR, Oct. 20, 2000)
REQUIREMENTS FOR MANIFEST
A manifest in coastwise trade for cargo and
passengers transported from one place or port in
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the Philippines to another is required when one or
both of such places is a port of entry (Sec. 906,
TCC). Manifests are also required of vessel from a
foreign port (Sec. 1005, TCC).
IS MANIFEST REQUIRED ONLY FOR
IMPORTED GOODS?
NO. Articles subject to seizure do not have to be
imported goods. Manifests are also required for
articles found on vessels or aircraft engaged in
coastwise trade. (Rigor vs. Rosales, GR No. L-
33756, October 23, 1982)
UNMANIFESTED CARGO IS SUBJECT TO
FORFEITURE whether the act of smuggling is
established or not under the principle of res ipsa
loquitur. It is enough that the cargo was
unmanifested and that there was no showing that
payment of duties thereon had been made for it to
be subject to forfeiture.
SETTLEMENT OF FORFEITURE CASES
General Rule: Settlement of cases by payment of
fine or redemption of forfeited property is
allowed.
Exceptions:
1. the importation is absolutely prohibited
or
2. the surrender of the property to the
person offering to redeem would be
contrary to law, or
3. when there is fraud. (Sec. 2307, TCC)
ACQUITTAL IN CRIMINAL CHARGE NOT RES
JUDICATA IN SEIZURE OR FORFEITURE
PROCEEDINGS
Reasons:
1) Criminal proceedings are actions in personam
while seizure or forfeiture proceedings are
actions in rem.
2) Customs compromise does not extinguish
criminal liability. (People vs. Desiderio, GR
No. L-208005, November 26, 1965)
NOTE: At any time prior to the sale, the
delinquent importer may settle his obligations
with the Bureau of Customs, in which case the
aforesaid articles may be delivered upon payment
of the corresponding duties and taxes and
compliance with all other legal requirements (Sec.
1508, TCC)
ABATEMENT
The reduction or non-imposition of customs duties
on certain imported materials as a result of:
1) Damage incurred during voyage;
2) Deficiency in contents packages
3) Loss or destruction of articles after
arrival
 167

4) Death or injury of animals

FRAUDULENT PRACTICES CONSIDERED AS

CRIMINAL OFFENSES AGAINST CUSTOMS
REVENUE LAWS
1) Unlawful importation;
2) Entry of imported or exported article by
means of any false or fraudulent practices,
invoice, declaration, affidavit, or other
documents;
3) Entry of goods at less than their true weights
or measures or upon a classification as to
quality or value;
4) Payment of less than the amount due;
5) Filing any false or fraudulent claim for the
payment of drawback or refund of duties upon
the exportation of merchandise; or
6) Filing any affidavit, certificate or other
document to secure to himself or others the
payment of any drawback, allowance or
refund of duties on the exportation of

merchandise JUDICIAL REMEDIES

greater than that
legally due (R.A. 1125)
thereon. (Sec. (the act that created the COURT OF TAX APPEALS (CTA),
3602, TCC)
as amended, and THE REVISED RULES OF THE CTA)

JURISDICTION OF THE
COURT OF TAX APPEALS

EXCLUSIVE APPELLATE JURISDICTION

OVER CIVIL TAX CASES

a. Cases within the jurisdiction of the Court En

Banc
Petition for review under Rule 43, RRC before
the CTA En Banc-Involving decisions or
rulings of the CBAA and the RTC in the
exercise of its appellate jurisdiction.

b. Cases within the jurisdiction of the Court in

Divisions
Petition for Review under Rule 42, RRC
before a division of the CTA- Involving
decision, ruling or inaction of the CIR,
Commissioner of Customs, Sec. of Finance,
Sec. of Trade and Industry and Sec. of
Agriculture or the RTC.

CRIMINAL CASES

Under RA 1125, CTA has no criminal jurisdiction-

It may refer the matter to the proper official for
 168 |TAXATION LAW REVIEWER
investigation or prosecution. (Ollada vs. CTA, 99
Phil. 604, 1956)
a. Exclusive original jurisdiction
 Criminal cases arising from violations of
the Tax Code and the Tariff Code and
other laws, part of laws, or special laws
administered by the BIR or the Bureau of
Customs.
 Offenses or felonies where the principal
amount of the taxes and fees, exclusive of
charges and penalties claimed is Php1M
and above or where there is no specified
amount claimed shall be tried by the
regular courts and the jurisdiction of the
CTA shall be appellate.
b. Exclusive appellate jurisdiction in criminal
cases
 Over appeals from the judgments,
resolutions or orders of the Regional Trial
Courts in tax cases originally decided by
them, in their respected territorial
jurisdiction.
 Over petitions for review of the
judgments, resolutions or orders of the
Regional Trial Courts in the exercise of
their appellate jurisdiction over tax cases
originally decided by the
 Metropolitan Trial Courts, Municipal
Trial Courts and Municipal Circuit Trial
Courts in their respective jurisdiction.
JUDICIAL PROCEDURES
JUDICIAL ACTION FOR
COLLECTION OF TAXES
1. Internal Revenue Taxes
Prescriptive periods for collection of taxes
a. If there is an assessment made, the
period shall be within five (5) years from
the finality of the assessment.
b. In the absence of an assessment and a tax
return was filed as long as it is not false
or fraudulent, the period to collect is
within five (5) years from date the tax is
due.
c. If no return was filed where one was
required, the period to collect is within
ten (10) from discovery of the omission
without need of assessment.
d. If the tax return filed was fraudulent,
collection may be resorted to without
need of an assessment within ten (10)
years from the discovery of fraud.
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Judicial tax collection arises:
a. If the self-assessed tax shown in the
return was not paid within the date
prescribed by law.
b. Final assessment is not protested
administratively within 30 days from
date of receipt.
c. Non-compliance with the condition laid
down in the approval of the protest.
d. Failure to file a timely appeal to the CTA
on the final decision of the CIR or his
authorized representative on the
disputed assessment.
Civil action as a means to collect tax
liability
 Resorted to when a tax liability
becomes collectible or
 When the tax assessment has
become final
 A civil action shall commence only
upon the approval of the CIR except
when expressly delegated by the CIR
to the Regional Directors. The civil
action for the collection of tax
liability shall be filed in the regular
courts. In such case, the taxpayer is
precluded from raising the following
defenses: 1) The BIR has no
authority to collect the tax within the
prescriptive period and 2) the
legality or validity of the assessment.
 Once the assessment has become
final, the civil case for collection of
such tax liability becomes akin to an
action to enforce a judgment such
that no inquiry can be made thereon
as the merits of the original case or
the justness of the final judgment
relied upon. (Mambulao Lumber Co.
vs Republic, GR. No. L-37061
September 5, 1984)
Q. How is judicial action for tax collection
commenced?
A. It is begun by (1) filing of a complaint with
the proper court, or (2) where the
assessment is on appeal in the CTA, by
filing by the government of the answer to
the taxpayer’s petition for review wherein
payment of the tax is prayed for. (Alhambra
vs. Collector, 105 Phil. 1337, May 29, 1959)
Civil action for tax collection can be
resorted to by filing a collection case in the
regular court where the assessment is
already final and demandable. It should be
noted that no civil action for the recovery of
taxes shall begun without the approval of
the CIR.

Q. May the BIR demand for the payment of
taxes in the same criminal action filed
against a taxpayer?
A. Yes. This is authorized under Sec. 205 (b) of
the Tax Code which provides: “judgment in
the criminal case shall not only impose the
penalty but shall also order payment of the
taxes subject of the criminal case as finally
decided by the Commissioner.”
2. Local Taxes
The local government unit concerned may
enforce the collection of delinquent taxes,
fees, and charges or other revenue by civil
action in any court of competent jurisdiction.
The civil action shall be filed by the local
treasurer within the period prescribed.
 Under RA 1125, The CTA has no
jurisdiction to take cognizance of tax
collection of local taxes and protested
local tax cases. However, under RA 9337
expanded jurisdiction of CTA, it has
jurisdiction over local taxes and real
property taxes.
 Civil action would preclude a criminal
case as a proper remedy for collection of
delinquent local taxes. (Republic vs
Patanao. L-22356, July 21, 1967)
Prescriptive Period
Local taxes, fees, or charges may be collected
within five (5) years from the date of
assessment by administrative or judicial
action. No such action shall be instituted after
the expiration of such period.
CIVIL CASES
Who may appeal mode of appeal, effect of appeal?
Any person, association or corporation adversely
affected by a decision or ruling of the CIR, CC, SF,
CBAA, RTC involving local taxes in the exercise of
their original or appellate jurisdiction , Sec. of
Trade and Industry and Sec. of Agriculture on
special duties may file an appeal to the CTA. Thus,
the Government is certainly not one of them.
(Acting Collector of Customs vs. CA, G.R. No. L-
8811, October 31, 1957)
 File a Petition for review under Rule 43, RRC
before the CTA En Banc-Involving decisions
or rulings of the CBAA and the RTC in the
exercise of its appellate jurisdiction.
 File a Petition for Review under Rule 42, RRC
before a division of the CTA- Involving
decision, ruling or inaction of the CIR,
Commissioner of Customs, Sec. of Finance,
Sec. of Trade and Industry and Sec. of
Agriculture or the RTC.
Suspension of Collection of Tax
169
a. Injunction not available to restrain
collection
An appeal to the CTA does not by itself
suspend the payment, levy, distraint
and/or sale of any property of the
taxpayer for the satisfaction of his tax
liability. So that, notwithstanding the
appeal, the CIR may proceed to collect the
tax assessed against the taxpayer. The
taxpayer here may petition the CTA for
the issuance of a writ of injunction to
stop/defer the collection of subject tax.
Requisites:
1. The injunction is an incident of a case
over which the CTA has jurisdiction.
2. That the collection pending appeal
might jeopardize the interest of the
government and/or the taxpayer.
3. That the taxpayer shows that the
appeal is not frivolous nor for the
purpose of delaying the tax collection.
4. The taxpayer is willing to deposit the
amount claimed or to file a surety
bond for not more than double the
amount of the tax with the court when
required.
Taking of Evidence
 Trials are generally conducted en banc,
but the Court may delegate to a member
the taking of evidence, after which said
judge submits a report to the Court.
 Reception of evidence may be assigned to
one of the judges:
a. In the determination of a question of
fact.
b. When the taking of account is
necessary.
c. When the issue of fact requires
examination of long accounts.
Motion for Reconsideration or New Trial
A party adversely affected by a ruling, order,
or decision of a division of the CTA may file a
motion for reconsideration or motion for new
trial before the same division within 15 days
from notice.
Appeal to the CTA En Banc
A party adversely affected by a resolution of a
division of the CTA on the motion for
reconsideration or motion for new trial may
file a petition for review with the CTA En
Banc.
Petition for Review on Certiorari to the
Supreme Court
A party adversely affected by a decision or
ruling of the CTA En Banc may file with the
 170 |TAXATION LAW REVIEWER
SC a verified petition for review on certiorari
under Rule 45, RCC.
Note: In cases of inaction of the CIR and an
appeal has been filed by the taxpayer with the
CTA, the CIR cannot later decide on the
protest since under Rules 42 and 43,RRC, the
CIR has only residual jurisdiction over the
case after the appeal has been made.
CRIMINAL CASES
Institution and Prosecution of Criminal Actions
Institution on civil action in criminal action
When the government (BIR or BC) files a criminal
action against a taxpayer, the corresponding civil
action for the recovery of the civil liability (taxes,
interests, surcharge, and other penalties) is
deemed to necessarily carry with it the filing of the
civil action and it shall at all times be
simultaneously instituted with, and jointly
determined in the same proceeding by the CTA.
Hence, there is no need to reserve the filing of such
civil action separately from the criminal action.
Appeal and Period of Appeal
Solicitor General as counsel for the People and
government officials sued in their capacity
Q. Who should institute appeal in the tax cases
for and in behalf of government?(From CTA
to SC)
A. The institution or commencement before a
proper court of civil or criminal actions and
proceedings arising under RA 8224 shall be
conducted by legal officers of the BIR. An
Appeal from such court, however, is not a
matter of right. The SC maintains that it is
the Solicitor General who has the primary
responsibility to appear for the government
in appellate proceedings. (Commissioner of
Internal Revenue vs. La Suerte Cigar and
Cigarette Factory, 433 Phil. 463)
NOTE: The legal officers of the BIR are
authorized to commence tax proceedings or
civil actions before the regular courts and the
CTA but are not authorized to institute appeal
proceedings without the participation of the
Solicitor General.
Petition for Review on Certiorari to the Supreme
Court
Appeal
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A party adversely affected by a decision or ruling
of the Court en banc may appeal therefrom by
filing with the Supreme Court a verified petition
for review on certiorari within 15 days from
receipt of a copy of the decision or resolution.
Motion for New Trial or Reconsideration
Within 15 days from receipt of a copy of the
resolution denying the motion for reconsideration
of for new trial
Effect of Appeal
If appeal is made during pendency of the motion
for reconsideration or for new trial, said motion
shall be deemed abandoned.
TAXPAYER’S SUIT IMPUGNING THE
VALIDITY OF TAX MEASURES OR ACTS
OF TAXING AUTHORITIES
Taxpayer’s Suit is a class suit brought by one or
more taxpayers (natural or juridical) on behalf of
themselves and as representation of a class of
taxpayers situated within a taxing district and for
the purpose of seeking relief from illegal or
unauthorized acts of the government or its tax
officials which are injurious to their common
interest as taxpayers.
 It may include a legislative enactment or
ordinance that is directly involved in the
illegal disbursement of public fund derived
from taxation.
 It is permitted whenever there is a waste or
unlawful use of public funds or property.
 The illegal actions of public officials are in
some way injurious to municipal and public
interest and if allowed to continue, it will
result in increase burden or disadvantage to
the taxpayers.
 This action is designed to obtain a relief and
not to stop the imposition of a burden.
Taxpayer’s suit vs Citizen’s Suit.
In a taxpayer’s suit, the complainant or plaintiff is
affected by the expenditure of public funds while
in the citizen’s suit, he is but a mere instrument of
the public concern.
Requisites of a Taxpayer’s Suit
1. Tax money is being exacted and spent in
violation of specific constitutional protections
against abuse of legislative power.
2. Public money is being deflected to any
improper purpose (Pascual vs. Sec of Public
Works, 110 Phil. 22, (1960).
3. The petitioners seek to restrain the
respondents from wasting public funds
through enforcement of an invalid or
unconstitutional law.
NOTE: The SC has discretion as to whether
or not to entertain a taxpayer’s suit and could
 171

brush aside the lack of locus standi where the
issues are of transcendental importance in
keeping with the court’s duty to determine
that public offices have not absurd the
discretion given to them. [Kilosbayan,
Incorporated vs. Guingona, Jr., 232 SCRA 110
(1994)]
agency or instrumentality of the
government; and
3. the lack of any other party with a more
direct and specific interest in raising the
questions being raised. [Kilosbayan,
Incorporated vs. Guingona, Jr., 232
SCRA 110 (1994)]

A tax payer has the right to file an action
questioning the validity or constitutionality of
a statute or law on the theory that the
expenditure of public funds by an officer of the
government for the purpose of invalid law
constitutes a misapplication of such
Ripeness for Judicial Determination
An issue is ripe for judicial determination
when litigation is inevitable, or when
administrative remedies have been
exhausted. (Corsiga vs. Defensor, G.R. No.
139302, October 28, 2002).

funds. (Gascon vs. Arroyo, G.R No.78389,

October 16, 1989)

Concept of Locus Standi as Applied in

Taxation
For legislators, there must be a claim that the
official action complained of infringes upon
their prerogatives as legislators.
(David, et al., vs. President Gloria Macapagal-
Arroyo, etc.,et al, G.R No. 171396, May 3,
2006)

Locus standi, being merely a matter of

procedure, have been waived in certain
instances where a party who is not personally
injured may be allowed to bring suit. The
following are examples of instances where
suits have been brought by parties who have
not been personally injured by the operation
of a law or any other government act but by
concerned citizens, taxpayers or voter who
actually sue in public interest.
a. The taxpayer’s suits to question contracts
entered into by the national government
or government-owned or controlled
corporations allegedly in contravention of
law.
b. A taxpayer is allowed to sue where there
is a claim that public funds are illegally
disbursed or that public money is being
deflected to any improper purpose or that
there is wastage of public funds through
the enforcement of an invalid or
unconstitutional law. (Abaya vs. Ebdane,
G.R No. 167919, February 14, 2007)

Doctrine of Transcendental Importance

There being no doctrinal definition of
transcendental importance, the following
determinants formulated by former Supreme
Court Justice Florentino P. Feliciano are
instructive:
1. the character of the funds or other assets
involved in the case;
2. the presence of a clear case of disregard
of a constitutional or statutory
prohibition by the public respondent